What Is Classed As A Small Business?
Small businesses are a major priority in the world of federal government contracting, but they must also fit a certain size standard to be classified as a small business for government contracting programs. The specific definition of a small business depends on the industry in which the business operates.
There are two primary methods the government uses to determine business size, depending on the business's industry.
1. Receipts Method for Service Industries
This is the total income plus the "cost of goods sold". Receipts are calculated over either a three-year or a five-year average. For firms that have been in business less than five years, you would use the total receipts for the period the company has been in business, divided by the number of weeks in business, multiplied by 52.
2. Number of Employees Method for Manufacturing Industries
This is the average number of employees over the business's last 12 calendar months. The number of employees includes the employees of its domestic and foreign affiliates as well as part-time and temporary employees, which are counted the same as full-time employees. Firms in business for less than one year should use the average number of employees for each of the pay periods during which they have been in business.
The results from either method 1 or 2 are then aligned with the business’s NAICS code, which represents the industry in which the business operates, to determine whether they qualify as a small business.
Do you Qualify as a Small Business?
You can check whether your business qualifies as a small business by using this size standards tool.
Types of Small Business Set-Asides
For those who qualify as small businesses, the U.S. Small Business Administration (SBA) offers a number of programs designed to help them win their share of federal government contracts.
For example, the U.S. federal government has a goal of awarding 23% of prime contracts to small businesses and 30% of subcontractor contracts to small businesses. These small business set-aside opportunities can be either competitive or sole-sourced.
Below are definitions for several of the most commonly used socioeconomic categories these set-aside programs are designed to support:
Women-Owned Small Business
The SBA defines a Women-Owned Small Business (WOSB) as a small business in which women manage the day-to-day operations and make long-term decisions. The business must be at least 51% controlled and owned by women who are U.S. citizens. The government aims to award at least 5% of federal contracting dollars to qualifying WOSBs every year.
8(a) Small Disadvantaged Business
The 8a Program, sometimes stylized as 8(a), is a business assistance program for small disadvantaged businesses owned by socially and economically disadvantaged individuals. As of FY 2024, the government aims to award at least 13% of federal contracting dollars to qualified small disadvantaged businesses. This percentage will gradually increase until it reaches 15%.
Service-Disabled Veteran Owned Small Business
The definition of a Service-Disabled Veteran Owned Small Business (SDVOSB) is a small business that is 51% owned and controlled by one or more service-disabled veterans (who must have a service-connected disability), and that has one or more service-disabled veterans managing day-to-day operations who also make long-term decisions. The government aims to award at least 3% of all federal prime and subcontracting dollars to qualifying SDVOSBs firms every year.
HUBZone
First authorized in 1997, the SBA's HUBZone program provides contracting assistance to small businesses located in economically distressed communities to spark economic activity, such as job creation, referred to as Historically Underutilized Business Zones, or HUBZones. The government aims to award at least 3% of federal contracting dollars to HUBZone-certified small businesses every year. Of the small business programs, it is the only program not focused on the ownership of the business, but rather the location of the business and its employees.
Many government agencies have offices of small and disadvantaged business utilization (OSDBUs) and/or small business programs that are focused on maximizing the opportunity for small businesses, but to take advantage of them, contractors must have the proper small business and minority owned certifications.
How to Win Government Contracts for Your Small Business
Now that you understand common socioeconomic categories designed to help small businesses like yours thrive in the government contracting space, it's important to understand the specific steps your business can take to find and win more small business contracting opportunities.
Here are three tips that will make it easier to win government contracts for your small business.
- Subcontracting: As a way to demonstrate past experience, small businesses often break into government contracting by first seeking out subcontracting partnerships and serving as a member of a prime contractor's team. By teaming with a prime, your firm can gain valuable contracting experience while avoiding the complex compliance requirements and challenges alone.
- Mentoring: Small businesses can get valuable business development coaching and mentoring from an experienced government contractor through the SBA’s Mentor-Protégé Program (MPP).
- Networking: Reach out to an agency's small-business office to secure contracts and learn about their small-business goals. Make sure that the agency has your firm's capability statements on hand to influence future procurements and increase your potential of being included in the bidder's pool for upcoming projects.
If you want to find more specific steps you can take to grow your government sales in the public sector and win more small business opportunities, then Deltek’s guide on Selling to the Government as a Small Business will help. It is designed to provide an understanding of government acquisition priorities and policies, and assist in building a small business public sector sales strategy.
Free Guide
How to Win Small Business Government Contracts
Download this guide to learn how to get your small business started in government contracting and get tips on bidding on contracts and developing a strong proposal.
Government Contracting Compliance for Small Businesses
One of the most important aspects when starting out in government contracting is to comply with all the rules and regulations outlined by the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
The FAR gives federal agencies overarching guidance on audits – a set of consistent, uniform policies and procedures within the federal acquisition process. The CAS are meant to create consistency in pricing and accounting practices.
Contractors who hold any Department of Defense (DoD) contracts must also be in compliance with the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA), which conduct a variety of audits to assure the government that your business is operating within approved parameters.
Furthermore, many businesses receiving funding from the DoD will need to meet various Cybersecurity Maturity Model Certification (CMMC) compliance levels. As your small business grows, it's essential to reduce the risk of non-compliance by establishing consistent internal standards for timekeeping, travel, delegation of authority, accounting, estimating, billing, and labor.
Getting Started with DCAA Compliance
If your business lacks a clear understanding of internal controls and project reporting, prepare to make the DCAA severely unhappy! Tracking project information and maintaining iron-clad financial accuracy is key to staying within the agency's good graces and to being considered for future contract needs.
Your accounting system should be able to track costs separately, such as direct and indirect costs, accounting costs, billing costs, and labor costs. Ideally, it should be fully integrated with your timekeeping system and be able to track all the reports the DCAA wants to see during an audit.
Accounting solutions that are not purpose-built for government contractors can fall short in the eyes of government agencies because of the depth, layers, and nuances required to meet the meticulous standards many contracts demand.
Additionally, as you deliver more contracts, your company will grow as you win more business and larger projects with more moving parts. Managing more work generally means adding more headcount to address a project's needs as quickly and efficiently as possible. It is not uncommon for a government contractor to go from a 20-person shop to an 80-, 90-, 100-, or even 200-person operation in 12 to 24 months, based on contract needs and requirements. This is when accounting solutions that are not already purpose-built for compliance can become more limited in terms of capability and process management.
Free Guide
Your Guide to Government Compliance
Navigating compliance regulations can be difficult for even the most seasoned of government contractors. Get an overview of top priorities and how Costpoint provides a clear path to compliance.
Selecting a Small Business Accounting Solution
Small businesses face unique challenges that require a careful balance of limited time and resources with running a project-based firm. To alleviate these challenges, start with Deltek's government contracting solutions, which have supported small businesses for over 30 years.
GovWin IQ, a market intelligence solution, and Costpoint, an enterprise resource planning (ERP) solution, serve as strategic tools that provide competitive advantages, bringing together disparate processes to help your small business succeed.
