Keeping Small Businesses "Small" for Longer Periods

There are many Government programs that accrue benefits to small businesses. One of the best, for small businesses at least, are the Federal Government's small business contracting and subcontracting goals and the contracts that are "set aside" for small businesses to help the Government achieve those goals. SBA loans are also at the top of the list of Government benefits for small businesses. SBA loans offer working capital at reasonable rates - sometimes to small businesses who might not otherwise qualify for loans.

Small businesses are determined by their size, either headcount or revenue. Those standards vary widely depending upon industry. for example, the SBA size standards for food service contractors, accounting offices, and roofing contractors are $41.5 million, $22 million, and 16.5 million respectively. Manufacturing and Wholesaling businesses tend to be stated in terms of number of employees while Construction, professional, scientific, and technical service industries tend to be stated in sales dollars.

The problem with these rigid measurements is that a company that wins one or two major contracts might suddenly be removed from SBA benefits because they "size out". Sometimes however, those peaks are only temporary and when the contract(s) end, the companies revert to their normal sizes.

Last month, two Congressmen (a Democrat and a Republican) introduced legislation designed to mitigate the effects of sudden growth, protecting small businesses from being prematurely forced out of the small business category. The bill would grant small businesses additional time to transition before competing in the open market. According to the press release accompanying this bill,

SBA's (Small Business Administration) programs are designed to support small businesses that fall below certain size standards. Once those thresholds are exceeded, businesses face new challenges such as no longer being eligible to qualify for SBA loans, contracts and other assistance, and having to compete in the open market against much larger businesses. Sudden growth in the form of receiving one or two sizable contracts results in spikes in employee count, which in turn may place a small business prematurely out of the size standard and limits their time to grow.

This new bill, entitled "Caputring All Small Business Act of 2019" provides a solution to this problem. It does so by lengthening the calculation period used to determine average employee count from the preceding 12 months to 24 months.

SBA - Size Restrictions Now Based on 5-Year Averaging

On Monday, this week, the President signed into law several bills, one of which was H.R. 6330, the Small Business Runway Extension Act of 2018" (SBREA). The SBREA modifies the method for prescribing size standards for small businesses. Basically, this is a one-word change but it will, in most cases, benefit small businesses. The Law amends 15 USC 14A, Section 632(a)(2)(C)(ii)(iii) by changing the number '3' to '5'.

For purposes of 15 USC 14A, a small-business concern is one that is independently owned and operated and is not dominate in its field of operations. To be a small business, the firm must not exceed certain size standards consisting of employment numbers and average annual average gross receipts over a period of time. Previously, the average was calculated over a period of three years. Under the new law, the average is to be calculated over a five-year period.

The objective of the legislation is to allow small business to stay small businesses longer. Instead of calculating revenues based on the trailing three-year average, small businesses can calculate average revenues based on the last five years. This works for growing companies - those who the Government has chosen to benefit. However, the converse is also true. Companies that are losing revenues may well stay in the non-small business category longer.

Calculating annual revenues based on averages, whether three or five years, smooths out a lot of the volatility in revenue recognition inherent in small businesses and start-ups. Far more companies will benefit from a five-year averaging scenario than those that might be harmed by it.

Bidders Have Only Five Days to File a Size Protest

Under SBA (Small Business Administration) regulations, a size protest of a sealed bid procurement is timely if it is received by the contracting officer prior to the close of business on the 5th day, exclusive of weekends and legal holidays, after bid opening (see 13 CFR 121.1004(a)(1)). An untimely protest will be dismissed (see 13 CFR 121.1004(d)).

Last April, VA (Veterans Affairs) issued an invitation for bids for a construction project. The procurement was set aside for service-disabled veteran-owned small business concerns. In May, VA publicly opened bids and determined that a company named C3T was the low bidder.

Subsequent to award, an unsuccessful bidder for the construction project, American Patriot Construction Services files a size protest with the contracting officer challenging C3T's status as a small business. American Patriot alleged that C3T was affiliated with several other concerns through common ownership. The contracting officer forwarded the protest to the SBA Office of Government Contracting (OGC).

The OGC dismissed American Patriot's protest as untimely as it had not been submitted to the contracting officer with five business days after bid opening.

American Patriot was not going to take that dismissal lying down so it filed another appeal, this time to SBA's Officer of Hearings and Appeals (OHA). American Patriot maintained that OGC erred in applying the SBA rules. It should have applied FAR 33.1 which gives it 30 days to file a protest. American Patriot argued that it did not file a challenge to the legality or ability of C3T to bid the solicitation, but rather the legality of awarding this contract to C3T based upon misrepresentation of business size in its Representations and Certifications. American Patriot asserted that C3T illegally obtained the contract by falsely claiming to be a small business and therefore, the contract should be terminated.

OHA affirmed that the size appeal was properly dismissed and gave no credence to the argument that FAR, rather than the SBA rules, applied to the current situation.

Unsuccessful bidders must realize that five days from bid opening rolls around very fast and if there is to be a size protest, they need to act very quickly.

Don't Assume That Your Email was Duly Received by the Addressee

Here's a case involving the SBA's Office of Hearings and Appeals (OHA) but it has relevance beyond that particular venue. It involves a size protest to the contracting officer and subsequent appeal to OHA.

A size appeal must be filed at OHA within fifteen days of receipt of the size determination. An appellant received the size determination on February 3, 2015 but the appeal petition was not received by OHA until April 9, 2015 and therefore "plainly untimely". Under the relevant regulations, OHA has no discretion to extend or waive the deadline for filing an appeal.

The appellant maintained that it attempted to transmit its appeal by e-mail on February 18, 2015, which would have met the 15 day deadline. It produced an acknowledgement from its e-mail system entitled "Certificate of service." It also contained the phrase "Delivery to these recipients or groups is complete, but no delivery notification was sent by the destination server". There was a problem however in that OHA never received the appeal (or so it maintains).

By regulation, a document must be received at OHA in order to be considered filed. The regulations are clear that an appeal petition is not filed until it is actually received at OHA. SBA regulations provide that although e-mail is a permissible method of delivery, the sender is responsible for ensuring a successful, virus-free transmission, and the sender is encouraged to contact OHA by telephone to verify receipt. Accordingly, having chosen to submit its appeal by e-mail, the appellant was responsible for ensuring that the email successfully reached OHA. The appellant could not reasonably rely solely upon the acknowledgement from its e-mail system, particularly given that the appellant received no response, over a period of several weeks, from OHA.

It is critical to followup e-mail transmissions of important documents with a phone call or some other form of positive assurance, especially on time-critical matters. Do not assume that your and the Government's email systems are infallible.

Get an SBA Size Determination - Avoid Serious Penalties

The U.S. Small Business Administration (SBA) issued a new rule that will now limit the liability from fraud penalties for individuals or firms that misrepresent business concerns as being small for purposes of Federal procurement opportunities if they acted in good faith reliance upon small business status advisory opinions received from Small Business Development Centers (SBDCs) or Procurement Technical Assistance Centers (PTACs). The rule also established the criteria small business status advisory opinions must meet in order to be deemed adequate and specify the review process for such opinions.

This limitation on liability will only affect those firms that incorrectly claim status as small business concerns after obtaining small business status advisory opinions from SBDCs (administered by the SBA) or PTACs (administered by DoD). In Fiscal Year 2014, SBA determined that approximately 137 firms had represented themselves as being small for purposes of federal procurement opportunities were not small. Most of these cases however did not involve fraud, but instead were the result of errors or misunderstandings of the size regulations.

With regard to the small business status advisory opinion provision of the new rule, neither SBDCs nor PTACs are required to provide such opinions and it is not know how many SBDCs and PTACs will elect to provide such services, particularly given that no additional funding will be awarded to them to cover the cost of these services. Moreover, the SBA has no idea how much demand there will be for such services from those SBDCs and PTACs that offer them.

A small business status advisory opinion is a written opinion issued by either a SBDC or a PTAC which concludes that a firm is entitled to represent itself as a small business concern for purposes of federal government procurement opportunities. An SBDC or PTAC must sumit a copy of each small business status advisory opinion it issues to the the SBA. The opinion must

1. provide a written analysis explaining the reasoning underlying the SBDC or PTAC's determination that the covered concern (along with its affiliates) either does or does not exceed the size standards. This analysis must be signed by an SBDC or PTAC business counselor or similarly qualified individual.
2. include a copy of an SBA Form 355
3. include copies of the evidence (such as payroll records, timesheets, federal income tax returns, etc.) provided by the covered concern to the SBDC or PTAC clearly documenting its annual receipts and/or number of employees as those terms are defined by the SBA.

The SBA will decide within 10 days whether to accept or reject the opinion. Once that opinion is received, a concern may rely upon that determination for purposes of responding to Federal procurement opportunities from the date it is issued until the concern undergoes a significant change in its ownership, management, or other factors bearing on its status as a small business concern. 

This will not foreclose on interested parties protesting a competitor's size. Even holding such an opinion, a firm's size may still be protested by interested parties in connection with a specific procurement.