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Understanding Small Business Certification

As companies vie for their share of federal funds in a competitive market, many are weighing the benefits of a small business certification. CPAs often field questions from clients about how to capitalize on federal contracting opportunities.

In addition to providing guidance on starting a business and obtaining financing, the Small Business Administration (SBA) provides small businesses with an avenue for obtaining certifications that may be required when conducting business with the federal government. Obtaining a certification allows businesses to take advantage of federal contracting opportunities awarded only to certified small businesses (commonly referred to as set aside opportunities).

The first step is to determine whether your business qualifies as a “small business”. The SBA defines a small business based upon the North American Industry Classification System code (NAICS) associated with the type of business. Small business size standards are measured by either annual receipts or number of employees . For example, ship repair performed in a shipyard falls under NAICS code 336611 and has a size standard of 1,000 employees; drilling of oil and gas wells falls under NAICS code 213111 and has a size standard of $7 million in receipts (per CFR 121.201). For companies that perform services under multiple NAICS codes, the rule of thumb is to identify all of the applicable codes and determine the percentage of services provided under each code.

  • The SBA calculates the number of employees by counting all individuals employed on a full-time, part-time or other basis. This includes employees sourced from a temporary employee agency, professional employee organization or leasing concern. If the size standard is based on the number of employees, the SBA will calculate an average number of employees based upon each of the pay periods for the preceding completed 12 calendar months (CFR 121.106). Part-time and temporary employees are counted as full-time employees.
  • The SBA calculates annual receipts (CFR 121.104) based upon total income plus cost of goods sold, as reported on the business federal tax return forms. Receipts exclude net capital gains or losses, taxes if included in income and proceeds from transactions between a concern and its domestic or foreign affiliates. The receipts calculation is based upon the average receipts for the prior three completed fiscal years. If a business has been operating for less than three years, the SBA will consider the number of weeks the company has been in business in order to calculate annual receipts.

The next step is to certify your business is a “small business”. The System for Award Management (SAM) was launched to replace the Central Contractor Registration (CCR) previously used to register to do business with the federal government as well as the Online Representations and Certifications Application (ORCA) previously used to certify as a small business. The SAM combines the registration and certification steps and is a comprehensive database of vendors doing business with the federal government. Federal acquisition rules require all vendors to be registered in the SAM prior to awarding of contracts or purchase agreements.

Businesses should allow enough lead time to properly register in the SAM in order to respond to federal contracting opportunities. Be proactive; don’t wait to register in the SAM until you see a contracting opportunity. Delaying your registration may result in missing deadlines for requests for proposals (RFPs) as most RFPs require businesses to have a CAGE code which is only assigned upon registration in the SAM.

  • You aren’t done yet. There are additional small business designations that can distinguish your business from the competition. Examples of such designations include HUBZone, Native American, 8(a) Business Development, Women-Owned Small Business, Veteran & Service-Disabled Veteran Owned, Alaskan Owned and Native Hawaiian Owned. Each of these special designations has additional qualification standards and reporting requirements to be evaluated when certifying. Detailed information on each of the special designations is available on the SBA website at www.sba.gov.
  • While the initial process of understanding small business designations and finding the right program can be overwhelming, local SBA offices are available to help companies get started. Experienced legal and accounting professionals can also help businesses identify applicable programs and assist with the regulations and reporting requirements.

You may just find that the federal contracting opportunities for small businesses are worth the effort!