3 Major Tips for Small Businesses Doing Business with The Government

by Tyler Freiberger, Senior Associate

  • Government Contracting

The stiff competition and complex regulations around government contracting can be daunting for small businesses regardless of their years of experience. While no short blog list can cover everything necessary for a small business to successfully win and perform this work, these three areas deserve particular attention.

1. Know How to Use Small Business Preferences and What Can Disqualify You.

Most small businesses know that the Small Business Administration (“SBA”) works with federal agencies to set annual small business contracting and subcontracting targets. These goals drive federal agencies directly to small businesses in general and toward other SBA certified businesses such as an 8(a), VOSB, SDVOSB or WOSB. Given that over 25% of all government contract funds are awarded to meet these goals, understanding the qualifying rules is a must.

What constitutes “small” or otherwise  qualifying is defined by 13 C.F.R. § 121 and 124. In short, the definitions rely on a business’s NAICS code (North American Industry Classification System), then industry by industry determine what is “small” by either number of employees or revenue/year.

Products – number of employees

Services – revenue test

Simple enough in theory, but many small businesses are surprised to learn about how easy it is to comply with all of this, and still be found to have falsely certified their size status. This all too frequently happens through “affiliation” between a small business and another, typically much larger, business. The SBA provides a thorough guide on all the various affiliation causes. One worth highlighting, the dreaded “ostensible subcontractor trap.” This occurs when a small business is used as a prime contractor for award but a larger more experienced business exerts too much control over the contract. There are several factors considered when measuring for this affiliation including: pre-existing relationships between the prime and sub, was the sub the incumbent contractor before the set-aside, and who approached whom for the partnering.

2. Product Sales Are Subject to The BAA or TAA, But Not Both.

There is a seemingly endless amount of confusion over the domestic content requirements of products sold to the government. While we offer a very short introduction here, small businesses should pay particular attention to the rules for set aside contracts. The Buy American Act (“BAA”) and the Trade Agreement Act (“TAA”) differ significantly. The former uses a “component cost” test, then requires the products provided to the federal agency be “manufactured” in America. New guidance released on April 18, 2022, clarifies this component test will be applied to most construction materials used on projects funded by the recent infrastructure bill, but also applying a must stricter “Buy America” test for products primarily iron or steel. The TAA is an exemption to the BAA and instead tests if the provided product has been substantially transformed in the U.S. or in a designated country.

So, which applies to a small business’s product sales? It depends on the contract amount for most awards. The thresholds change but currently contracts for products over $183,000 and construction contract over $7,032,000 are subject to the TAA.  However, small business set aside contracts are exempt from the TAA exemption. No wonder there is confusion, right? Lastly, GSA MAS contracts are presumed to always be over the thresholds and therefore the TAA applies to those sales.

3. Service Sellers Beware.

If you are reading this and thought, well we only sell services, so thank goodness we don’t have to worry about that confusing BAA/TAA business, well, you instead will likely be dealing with the Service Contract Labor Standards (“SCLS”) formerly known as SCA. Again, we offer a small introduction here  and offer 10 must know facts here. If it has an SCLS in its contract, a small business will likely find particular trouble with the odd vacation requirements in SCLS Wage Determinations. This is because these requirements do not conform with typical PTO or other vacation policies and instead will require tracking the “anniversary date” of each covered service employee. This can be difficult without a sophisticated HR team in a company keeping track of each date and amount of leave. Vacation under the SCLS must be awarded in “cliff-vesting” amounts and must be used or paid to the employee by their next anniversary date.  Given this date is determined by when the employee started performing the contracted work, not when they were hired by the current contractor, it can be challenging to track and pay accordingly.