With a contracting budget approaching $650 billion per year, the United States government is the largest consumer of goods and services globally. In 2020, the federal government spent $145 billion, an equivalent of 26% of its total procurement spending, with small businesses. Breaking into government contracting can be a tremendous opportunity for small and emerging companies, but it also carries significant challenges and risks. Government contracts often impose unique requirements and complex regulatory schemes that differ significantly from the commercial marketplace.
The government is committed to working with small businesses and removing barriers preventing or discouraging small businesses from participating in the federal marketplace. The Small Business Administration (SBA) works with agencies and small businesses to ensure at least 23% of prime government contract dollars are awarded to eligible small businesses. To ensure this goal is reached, the government will limit competition for certain contracts to small businesses. These contracting opportunities are called small business set-asides. For any emerging companies considering competing for these opportunities, this article outlines basic steps that should be taken to get started in the government marketplace.
To be eligible to compete for government contracts reserved for small businesses, companies must be for-profit, be independently owned and operated and, generally, be physically located and operated in the United States or its territories. Companies must also meet the size standards set by the SBA. Typically, manufacturing businesses with 500 employees or fewer and non-manufacturing businesses with average annual receipts under $7.5 million will qualify as small businesses. The SBA maintains a list of size standards for different industries and provides tools for emerging companies to verify their size status on its website.
In addition to ensuring agencies set aside contracting opportunities for small businesses, the SBA runs several programs to help small businesses from different socio-economic classes win federal contracts. These programs include:
- The Small Disadvantaged Business Program. This program ensures that 10% of all federal contract dollars, roughly $50 billion in annual spending, is reserved for businesses owned by socially and economically disadvantaged individuals. The Biden administration has vowed to increase the share of contracts awarded to Small Disadvantaged Businesses (SDBs) by 50% by 2025. SDBs may also be eligible to participate in the SBA’s 8(a) Business Development program, a nine-year program designed to help SDBs compete for federal contracts.
- The Women-Owned Small Business Federal Contracting Program. This program ensures that 5% of federal contract dollars goes to Women-Owned Small Business (WOSBs) and Economically Disadvantaged WOSBs (EDWOSBs). The government will limit competition for federal contracts in certain industries where WOSBs are underrepresented to meet this goal.
- Veteran-Owned Small Business Programs. The government maintains several programs designed to ensure Veteran-Owned Small Business (VOSBs) and Service-Disabled Veteran-Owned Smalls Businesses (SDVOSBs) are awarded at least 3% of federal procurement dollars. The Department of Veterans Affairs (VA) also awards many contract dollars on set-aside contracts for veterans.
- The HUBZone Program. The federal government also sends 3% of federal contract dollars to historically underutilized business zones (HUBZones) by reserving contracting opportunities for businesses that demonstrate at least 20% of their employees are HUBZone residents.
Emerging companies must register their business on the government’s System for Award Management (SAM) website to compete for federal government contracts. SAM is the government-wide point of entry where the agencies are required to post notices of all contracting opportunities over $25,000.
To register in SAM, emerging companies must obtain a Dun & Bradstreet (DUNS) number and determine which North American Industry Classification System (NAICS) code matches their products and services. A DUNS number is a unique nine-digit identification number for each business’s physical location.
When registering in SAM, emerging companies must self-certify as a small business to be eligible to compete for small business set-aside contracts. The SBA’s small business size standards depend on the NAICS code matching a company’s primary goods and services. Emerging companies should check the size standards for their industry code to verify they meet the small business size requirements.
Emerging companies may need to complete additional registration requirements to compete for set-aside contracts reserved for the socio-economic programs run by the SBA. The SBA outlines the certification requirements for these programs on its website.
Look for Opportunities
In addition to the contracting opportunities posted on SAM, many agencies have Offices of Small and Disadvantaged Business Utilization (OSDBUs) or Offices of Small Business Programs (OSBPs). These offices work to identify opportunities to contract with small businesses.
The government also requires that awardees of large contracts subcontract out parts of the work to small businesses. Small businesses competing for subcontracting work with large government contractors must be certified as small for the NAICS code on the solicitation to count toward the small-business subcontracting goal. The SBA maintains a list of directories to help connect small businesses with subcontracting opportunities.
Small businesses are subject to the scrutiny of agency inspector generals and the Department of Justice (DOJ). Falsely claiming to be a small business may result in liability under the False Claims Act (31 U.S.C. §§ 3729 – 3733). To mitigate the risk of misclassifying as a small business, emerging companies should adhere to the following:
- Ensure staff understands the rules.
- Remain alert to regulatory changes.
- Certify compliance.
Awardees of small business set-aside contracts may also face size protests from unsuccessful bidders. Protests challenging a company’s small business certification are handled by the SBA Government Contracting Area Offices serving the area in which the protested business’s headquarters is located. Protests challenging a company’s award under one of the SBA’s socio-economic programs are decided by the applicable program office within the SBA’s Office of Government Contracting and Business Development.
If the SBA determines that the winning business does not meet the size or classification requirements for the contract award, the business is not eligible for that contract. The SBA Office of Hearings and Appeals handles appeals of size determinations and will issue a final ruling.
For more information on getting started in government contracting, please contact Todd Overman or any member of our Government Contracts Practice group.
The author would like to thank our law clerk Allison Moors for her valuable contributions to this article.
Series: Key Considerations for Emerging Companies
Early stage companies have particular legal needs. Bass, Berry & Sims has advised such companies at all phases, from startup to IPO. Our Emerging Companies Practice Group is releasing a “Key Considerations” series, in which we will share our experience by outlining the most critical factors a company should consider in the most relevant subject areas. Previous installments in our series focused on:
- International Trade (November 23, 2021)
- Privacy (October 11, 2021)
- Employment Law Risks (July 21, 2021)
- Equity Compensation (April 6, 2021)
- Formation and Structure (March 3, 2021)
Keep an eye out for future installments in this series.