Avoiding Two Common Small Business Self-Certification Mistakes
The federal government has moved away from self-certification in programs such as the Women-Owned Small Business Program and the Service-Disabled Veteran-Owned Small Business Program, but self-certification remains the rule for small-business set-aside contracts. Because an incorrect self-certification could lead to a successful protest, terminated contract, or even liability under the False Claims Act, it’s important to get it right. Here are two common mistakes new entrants to the federal market often make regarding small business self-certification.
1. The “One Size Fits All” Misconception
Some companies that are new to federal government contracting believe that so long as they qualify as a small business under their primary North American Industry Classification System (NAICS) code, they qualify as a small business for all federal contracting purposes. It’s not that simple.
Almost every federal solicitation is assigned a NAICS code, and every NAICS code has a corresponding size standard. To qualify for a small business set-aside solicitation, a company must fall below the size standard assigned to that solicitation. If the company is not small under the solicitation’s size standard, it does not qualify — even if the company is small under its primary NAICS code.
For example, consider a company with $30 million in average annual receipts whose primary NAICS code is 236220 (Commercial & Institutional Building Construction). The company qualifies as small under its primary NAICS code, which has a $45 million size standard. But if the government issues a small-business solicitation designated under NAICS code 238160 (Roofing Contractors), the company does not qualify for that solicitation because NAICS code 238160 has a $19 million size standard.
2. The “Subcontractors Don’t Count” Misconception
Some companies operating in the construction or services industries, under which small business size status is determined by reference to a company’s average annual receipts, believe that they can deduct amounts subcontracted to other companies. For example, if Company X wins a $10 million contract and subcontracts $4 million of the work to Company Y, Company X might believe that only $6 million counts toward the small business size standard cap.
This belief has some logical appeal, but it’s incorrect. The SBA’s regulation at 13 C.F.R. 121.104(a) specifies that “subcontractor costs . . . may not be excluded from receipts.” The SBA’s regulation does allow a few deductions, such as “taxes collected for and remitted to a taxing authority if included in gross or total income,” but the list of permitted deductions is short. Contractors should carefully read 13 C.F.R. 121.104(a) before assuming that a particular cost may be deducted.
Self-certification remains a foundational requirement for competing on small business set-aside contracts, but as these two examples show, getting it right takes more than a general sense that your company is “small.” Before certifying, confirm the size standard tied to each solicitation’s NAICS code and calculate your average annual receipts in line with SBA’s rules — without improperly excluding subcontractor costs. Verifying your size status on a solicitation-by-solicitation basis can be the difference between a clean award and a costly protest, contract termination, or even exposure to the False Claims Act.
Disclaimer:
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and information purposes only. Although the author strives to present accurate information, the information provided in this article is not guaranteed to be accurate, complete, or up-to-date. Reading this article does not establish an attorney-client relationship with the author.
