This is the third installment in the series on “How to win contracts from the world’s largest client, the US Government”, which started with the first article in which we talked about the structure of the government, the ways that a non-US company can use to access this gigantic market, the initial procedures that must be followed, types of government contracts and aspects to take into account when preparing bids.
In the second article we deal with the applicable regulations that must be taken into account, how some of them are barriers to entry of special relevance to international companies or their US affiliates, and what solutions can be used to cross them.
In this third and final installment of this series, we focus on analyzing the advantages that small businesses can benefit from and how they can be used by international companies as a way to access government contracts in the US.
Advantages for Small Businesses on Government Contracts
In the US there is a broad consensus about the need to support small businesses, which employ more than 47% of the country’s workforce and are a permanent engine of innovation and job creation. For this reason, the federal government has defined, by law, a contracting goal for small businesses of 23% of the total, which is usually exceeded, as happened in the last fiscal year (source SBA):
In fiscal year 2020, the federal government awarded 26% of contract dollars to small businesses, worth $146 billion
This includes both contracts awarded directly to small businesses as well as those that go through large prime contractors. The government favors the participation of small businesses by reserving some contracts for them and in other cases by requiring main contractors to subcontract a percentage of the contract budget to small businesses. The Federal Acquisition Regulations or FAR require that, in federal contracts valued at more than $750K ($1.5M in construction contracts), large prime contractors establish plans and goals for subcontracting to small businesses. State and local governments tend to favor these types of companies with similar mechanisms.
In addition to favoring small businesses in obtaining contracts, governments support them through all kinds of mentoring or training programs offered by many federal agencies, in particular the Small Business Administration or SBA. The SBA is an independent agency of the federal government that regulates everything related to supporting small businesses. Similar organizations can be found in each state and in local governments (counties, cities).
Requirements for a company to be considered a "small business"
The first condition that a small company must meet to access the advantages offered to them is to be established in the US, directly or through a subsidiary, which will be the one that will be presented as a “small business”. In the case of establishing a subsidiary, the type of entity selected (LLC, “corporation”) is not relevant, but if a “joint venture” (temporary union of companies) is created with US companies, there cannot be a participation of more than 49% owned by foreign entities.
Exceptionally, companies established outside the US may be considered as small if they have activities in the US that contribute significantly to the US economy through the payment of taxes or the use of US products, materials or labor. In practice, a local presence through a US company is almost always necessary.
For a company to be considered a small business in federal contracts, its volume must be below certain thresholds that depend on the sector in which it participates.
To determine the industry applicable to the company, the NAICS code (North American Industry Classification System) is used. The list of industries and codes can be found in the NAICS official document, which is the latest version (updated every 5 years).
The SBA size standards define the applicable thresholds for each industry, which must not be exceeded by the company to be considered a “small business”. They also state how to calculate the size metrics, which can be annual gross sales (average of the last 5 years) or number of employees. For each industry, the SBA chooses one of these two metrics. Some examples:
- In the aircraft engine and aircraft engine component manufacturing industry (NAICS 336412) the applicable limit is 1,500 employees,
- In the optical instrument and lens manufacturing industry (NAICS 333314) the limit is 500 employees.
- For management and administration consulting services companies (NAICS 541611), the limit is $16.5 million in annual gross sales.
- Sometimes different thresholds are defined for different sectors within the same NAICS code, as in the case of engineering services (NAICS 541330), for which an overall limit of $16.5 million applies, but an upper limit, of $41.5 million, is used for particular cases such as military weapons, naval engineering and marine architecture.
Obviously, a company can participate in different industries and therefore manage multiple NAICS codes, each with different thresholds. The applicable NAICS codes are clearly defined in the bid requests for federal contracts, from which the limits that must not be exceeded for a company to be considered as a small business are easily deduced.
Certain SBA programs have different size standards than those listed in the table, such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer Program (STTR), for which the standard size is 500 employees regardless of NAICS.
An important point is that, in the case of companies that are part of a business group, when calculating the company’s metrics, they must add the metrics of all the units of the group in any country, including the parent company and all subsidiaries. That is, if a company’s US affiliate falls below the limits, but when adding the figures of the foreign parent and other group companies the limits are exceeded, the US company cannot benefit from US small business advantages.
According to SBA regulations, to consider that there is affiliation between two companies and therefore the obligation to add the figures of two different companies when verifying compliance with the thresholds applicable to one of them, it is enough that one controls the other or both are controlled by the same natural or legal person.
For this reason, when a company considers acquiring a US company, it should carefully check to what extent it benefits from small business advantages and whether it will lose that condition as a consequence of the acquisition. In such a case, the loss of value that it may suffer may be considerable, in view of which the buyer must reconsider the price that can be accepted or even contemplate the cancellation of the operation.
Details on how to check if a business qualifies as a small business can be found at the SBA Program Guide and Enrollment Rules.
Can foreign-owned companies benefit from small business advantages?
In general, foreign-owned US companies may be considered small businesses in federal contracts if their metrics fall below SBA thresholds
It is important to note that in general, in federal contracts, the fact that a US company is owned by a foreign company does not prevent it from benefiting from the advantages offered to small companies, as long as it is below the thresholds described when adding the metrics of the group companies. SBA does not prevent it in its regulations and also confirmed this possibility explicitly in a 2018 decision in response to a protest filed by a company after the award of a defense contract reserved for “small business” to the US subsidiary of a Danish company (Size Appeal of A&Y Government Services, LLC, SBA No. SIZ-5966, Oct. 22, 2018). Details of this case can be viewed on the SBA Office of Hearings and Appeals, searching with the “appeal number” 5966.
That said, sometimes there are specific rules applicable in specific agencies or specific contracts that exclude foreign-owned companies from the advantages offered to small businesses. This frequently occurs in contracts from state or local agencies, which seek to benefit local entrepreneurs and often require that at least 50% of the company be owned by natural persons residing in the US (US citizenship or permanent residence / “Green Card”).
Additional advantages: DBEs, WOSBs, 8(a)…
Some types of small businesses may benefit from additional benefits, particularly those that are owned by disadvantaged people. In addition to obtaining easier access to certain government contracts, superior to other small companies, they can opt for training programs, advice and support for business development.
A Disadvantaged Business Enterprise or DBE (also sometimes called SDB or Small Disadvantaged Business) is a small business that has been certified as such by state or federal agency authorities. Certification standards for DBEs may vary for each organization, but generally require that the business be owned and controlled by persons belonging to disadvantaged minorities (African Americans, Hispanics, Native Americans, etc.), women (“woman-owned business”), or military veterans, with a net worth below a certain limit. With respect to Hispanics, the usual definition includes people originating from a list of countries that includes Spain, as well as Latin America.
Companies that are owned by natural or legal persons who do not reside in the US are normally excluded from these certifications, usually requiring the majority owners to be US citizens or permanent residents (people with a “Green Card”). In some cases, it is only allowed in the case of owners who are US citizens (this is the case of the NASA WOSB program).
Some agencies and states give benefits specifically to WOSBs or Woman-Owned Small Businesses. For example, the federal government has a goal that 5% of outsourcing goes to WOSBs. Similar benefits are offered to businesses owned by veterans of the US military, especially when they have suffered disabilities as a result of their service.
The certification process is also dependent on the agency or ministry that awards the contracts. Sometimes it is enough to declare compliance with the requirements, other times it is necessary to submit documentation and be certified by the applicable government client.
An interesting federal program is the 8(a), reserved for small businesses that are owned by US citizens residing in the US and meet certain requirements. It provides continuous support for the development of the company. It is not something that can be used initially by foreign entrepreneurs in a reasonable period of time and therefore we will not spend time explaining it.
Search for opportunities reserved for small businesses
To find opportunities in government contracts, you can use the channels already explained in the first installment in this series. Contract databases are usually searchable for contracts reserved for small businesses.
On the other hand, SubNet is a database of opportunities of subcontracting posted by large contractors looking for small businesses to serve as subcontractors.
Additionally, the SBA maintains a directory of primary contractors of the federal government that have subcontracting plans, which can be useful to identify companies with which you can collaborate on specific opportunities or on a regular basis. Similarly, the Department of Defense (DoD) maintains a similar directory of prime contractors, which can help small businesses find subcontracting opportunities.
Lastly, GSA maintains a forecast of business opportunities. federal contracts, which makes it possible to identify acquisitions of products or services that are going to be published in the future. The tool allows them to be filtered according to various criteria, one of which (“Acquisition Strategy/Type of Set-Aside”) can be used to find contracts reserved for small companies and companies with special advantages such as the 8(a)s or DBEs already mentioned, and others.
As we have explained in previous articles of this series (1 and 2), the importance of the government sector for international companies is considerable but will be even greater in the coming years, taking into account the huge infrastructure investment budgets recently approved. As we have described, small and medium-sized international companies can benefit in many cases from such contracts (especially those granted by the federal government) taking advantage of the great advantages granted to “small businesses”, provided that they operate through a subsidiary in the US and are below the thresholds applicable to their industry when adding all the subsidiaries of their business group.
Markentry USA helps international companies from multiple sectors in their process of entering the US government market, providing support in all the necessary steps, from feasibility study and strategic planning to the creation of a US subsidiary and continuous support for business development, including preparation of proposals. Our team has extensive experience helping international companies achieve the entry and execution of all types of government contracts, including areas as complex as NASA, technologies protected by ITAR or classified contracts.