When a small business decides to participate in the SBA 8(a) program matters…..
Upon entering the government contracting market, the runway for receiving the first award is in the range of 12-24 months. This is just the first award and it usually won’t be a prime contracting opportunity, meaning you don’t have direct access to the government customer. With such a long runway, many companies initially try to seek any advantages they can. There are many programs that are advertised as being propitious but beware of the nuanced considerations involved in the decision to pursue any of them.
Programs Of Interest
Programs like the SBA 7(j) Management and Technical Assistance Program, small/disadvantaged business certifications, the SBA 8(a) program, and GSA schedules, are often promoted in a way that appeals to small businesses. The programs are all different, they offer different benefits for different businesses at various stages of growth. Missing from the descriptions of these programs are details that interested prospective contractors should consider before participating. To reap the advertised rewards, contractors need to consider not only which program they join but also when they decide to enter.
When considering participating in one of these programs it’s important for small businesses to consider that the 8(a) program has an expiration date, GSA schedules have minimum orders, and small business certifications must be renewed on a regular basis. While it is generally true that having a small business certification can be helpful, it’s equally well known that capabilities matter more than certifications. GSA schedules are not a guarantee of money. Obtaining a GSA schedule without a strategy for identifying and pursuing government customers can easily end up as a negative return on investment. On the surface, while the program itself might not have an entrance fee, each of the maintenance activities requires an overhead labor expense and often other additional unforeseen costs.
The 8(a) program in particular requires participating at the most opportune time to maximize the potential for profit. The 8(a) program has a nine-year life span which is divided into two phases: an initial four-year developmental stage and a final five-year transition stage. The application process is extensive and requires financial, business organization, banking, and personal information to address the eligibility requirements such as proof of ownership and control of the business, social and economic disadvantage statements, business acumen, experience in the government market, and business revenues and number of employees. Generally, companies interested in the 8(a) program should already have worked with the federal government directly or as a subcontractor to a prime. The following discussion addresses the necessity for careful consideration by individually owned businesses of when to participate in the SBA 8(a) program.
The 8(a) program provides business development assistance to businesses owned and controlled by person or persons that are socially and economically disadvantaged, have good character, and demonstrate a potential for success. The program was established for disadvantaged individuals but now includes small businesses owned by Alaska Native Corporations (ANCs), Community Development Corporations (CDCs), Indian tribes, and Native American Organizations (NHOs). The three-part test used to determine economic disadvantage sufficient for participation in the 8(a) program is as follows:
- Net worth of less than $750,000 (excluding ownership interest in the applicant’s business, equity in their primary personal residence, and funds invested in an official retirement account.)
- Generally, no more than $350,000 in average adjusted gross income over the preceding three years
- No more than $6 Million in assets (excluding funds invested in an official retirement account)
Risk vs. Reward
Many companies will join the 8(a) program with hopes of receiving a sole source award. For an 8(a) sole-source contract including any options the maximum award for individually owned businesses is $4.5 Million. The threshold for awards to CDCs, ANCs, and NHOs is higher. That’s an attractive number, however, simply participating in the 8(a) program comes with no guarantee of business. The company still has several other hurdles to jump over before being considered for a sole-source contract award.
There is no requirement for companies entering the 8(a) program to have demonstrated past performance with the government. When bidding on contract work companies must demonstrate to the government that they can accomplish the work in the contract and perform successfully. Typically, Contractor Performance Assessment Ratings (CPARs) are the only way for companies to provide evidence of related past performance with the federal government.
These ratings are filled out by government contracting officers at every contract performance milestone and stored in a federal database for other contracting officers to access. Typically CPARS are reserved for prime contractors. If CPARs are unavailable for a company, there are certain circumstances in which the evaluation factors for a contract might allow for another type of past performance but there is no consistency with this consideration. Ultimately being awarded the first contract is the hardest as many opportunities require companies to prove their abilities.
In addition, if the company previously hasn’t received a contract award from the government valued at over $1 Million, they are perceived as being a higher risk bidder by the government. Providing evidence that the company has performed the same type of work that is required by the government is helpful. However, if the work was at a smaller scale the government construes the company’s capacity to handle larger amounts of government work and funding as lower and the risk higher.
The path to a $4.5 Million Sole-Source contract under the 8(a) program is not short nor is it without competition. Without adequate planning and relationship development ahead of time, the beginning of the program can be spent learning and catching up instead of getting the crucial first wins that are necessary to build upon. When assessing the probability of success it’s helpful to identify meaningful statistics. For instance, the DOD awarded 105 sole-source 8(a) contracts on or after March 17, 2020—the date that the increased threshold was implemented —which reflected an increase over prior years. These contracts were all over $22 million Half (50 percent) of the 105 sole-source 8(a) contracts were awarded to firms owned by Alaska Native Corporations; 32 percent were awarded to firms owned by Indian Tribes; and 18 percent to firms owned by Native Hawaiian Organizations.
With a longer than average runway for contract award and half of the sole-source contracts awarded by the DoD ultimately going to other than individually owned businesses, the landscape is still quite competitive and not for the faint of heart. Pursuing the 8(a) program can be helpful for companies with a clear understanding of government contracting processes and an aggressive plan for maximizing the program’s potential for growth. On the other hand, companies that are in the earlier stages of their government contracting journey are unlikely to find the 8(a) program to be an easy button. Early-stage government contractors would be wise to consider getting some experience in the market under their belts before pursuing programs like the SBA 8(a).
On Thursday December 2, 2021, Small businesses considering entering and already in the federal market got an early Christmas present from the Biden Administration.
There has arguably never been a better time to become a federal government contractor. On Thursday December 2, The Biden Administration revealed several reforms intended to increase federal spending transparency and the number of federal contracts going to small and underserved businesses. The move gives the Small Business Administration (SBA) more oversight of federal buying strategies in a bid to give small businesses a louder voice in federal procurement. According to a factsheet published about the reforms,
“less than 10 percent of federal agencies’ total eligible contracting dollars typically go to small-disadvantaged businesses (SDB), a category under federal law for which Black-owned, Latino-owned, and other minority-owned businesses are presumed to qualify. Moreover, while women own roughly 20 percent of all small businesses economy-wide, less than 5 percent of federal contracting dollars go to women-owned small businesses.”
To level the playing field for underserved communities and businesses, the White House intends to direct $100 Billion in federal contracting opportunities to Small Disadvantaged Businesses and increase the share of contracts awarded to small-disadvantaged businesses to 15% by 2025. This is consistent with the President’s Day One Executive Order (EO) 13985 which directed agencies to make procurement and contracting opportunities available for all eligible vendors and remove barriers to small and disadvantaged businesses.
In a first step towards meeting that ambitious goal the Biden Administration asked agencies to increase their goals such that government wide spending results in 11 percent of contracting dollars being awarded to small-disadvantaged businesses in FY 2022, a goal that is a little more than double the current small business spending goals of 5 percent.
In response to a recent GAO report that revealed small businesses in the federal market have decreased by sixty percent over the past decade the Administration has tasked agencies with benchmarking the inclusion of new entrants in the federal marketplace and developing strategies for diversifying the supply base. The administration intends to hold Senior Executive Service (SES) managers accountable for meeting small business goals by including progress towards achievement as a performance evaluation factor.
In addition, the reforms call for creating direct lines of access to senior leadership for Federal Offices of Small and Disadvantaged Business Utilization (OSBDUs), which play an important role in increasing contracting spend with small businesses.
It should also be noted that the Government is paying increasing attention to the outcomes of a process that enables agencies to buy as an organized entity rather than thousands of individual buyers. An analysis of “Category Management” spending since 2017 revealed that socioeconomic firms received a disproportionately lower share of contracts under the “Category Management” effort. As a result, the Biden Administration revised guidance for using “Category Management” to help federal agencies conduct more equitable buying practices.
If you’re wondering about how this move impacts the other small business designations including woman-owned small businesses, service-disabled veteran owned small businesses, and HUBZone businesses, spending goals for those categories will also be updated over the course of the next year.
To the small businesses that make up most of the American economy these announcements are the Administration’s warm holiday wishes for a prosperous new year.
Fact Sheet: https://www.whitehouse.gov/briefing-room/statements-releases/2021/12/02/fact-sheet-biden-harris-administration-announces-reforms-to-increase-equity-and-level-the-playing-field-for-underserved-small-business-owners/
Curiously, the Department of Defense’s contract obligations to small businesses grew from FY2011-2020 but the number of small businesses in the Defense Industrial Base (DIB) Shrunk by nearly half.
In a recent report published by GAO it was revealed that the DIB has been rapidly shrinking in numbers since at least 2011. According to their numbers there were 42,723 small businesses in the DIB in 2011 down to 24,296 in 2020. So how does the inverse relationship work when the obligations going to small businesses went from $70B in 2011 to over $80B in 2020? It’s clear to those small businesses remaining in the industry that there are a higher number of obligations going to a lower number of businesses.
In 2019 the DoD published its Small Business Strategy to encourage and facilitate contracting opportunities for small businesses. However, instead of an efficient, effective, and unified approach to implementing the strategy it has essentially turned into a smattering of unmonitored innovation hubs, acceleration stations, and requirements rodeos across the services. If it has appeared from an industry position that the DoD’s implementation of a small business strategy was uncoordinated at best… that’s because it is uncoordinated.
In the same report by GAO, it was highlighted that the DoD lacks plans, policies, or processes to effectively implement, monitor, measure, and continuously improve a small business strategy. Upon release of the strategy in 2019 each branch of the services quickly stood up their own tech entry programs resulting in a flurry of efforts to attract the best tech available in the commercial market. The NavalX TechBridges, AFWERX, AFVentures, & AFRL, Army Accelerators and Federally Funded R&D labs (just to name a few) were all quick to establish alluring small business entry programs.
Ideally these efforts would lower barriers to entry for small businesses, increase the rate of tech transition, and make defense and dual use technology available for anyone in the DoD to acquire. But in true governmental fashion instead of collaborating to distribute technology across the Defense Enterprise these units compete by setting differing expectations for small businesses interested in working with them.
This is not to say these efforts are unproductive or failing to increase the flow of technology into the DoD. Now is arguably as good a time as ever to become a government contractor. These changes are a sign of hope for many small businesses seeking to do business with the DoD. For those who look in the right places there are real opportunities for growth.
“For example, DOD’s Defense Innovation Unit (DIU) aims to accelerate the military’s adoption of innovative commercial technology. Officials told us DIU uses other transaction agreements to make awards more quickly and reduce burdensome FAR contracting requirements, allowing DIU to attract nontraditional defense contractors and keep pace with technological changes. As of 2020, 77 percent of DIU awardees were small businesses. Officials said DIU receives many proposals from small businesses because the requirements to work with DIU are not burdensome.”
DIU is one unit increasing the use of flexible acquisition methods such as Other Transaction Authority (OTA). Often less talked about are individually awarded OT agreements. These are awarded to small or large businesses individually (as opposed to via a consortium). In a February 2020 article by Jon Harper in National Defense Magazine, Director of Strategic Engagement for DIU Mike Madsen said at the time
“The Defense Innovation Unit has awarded about 150 contracts to 122 nontraditional vendors. Of those, 66 are first-time suppliers to the military.”
A year later DIU was still leading the way in DoD innovation. Their 2020 annual report revealed that in the past 5 years DIU has leveraged more than $11 billion in private investment. In 2020 alone DIU initiated 23 new projects (a 35% year over year increase), received a total of 944 commercial proposals, and saw an increase in the number of proposals by 52% compared with 2019. This is what industry wants to see across the DoD.
After speaking with a representative from National Security Innovation Network at an October 14, 2021 industry day hosted by the Pacific Northwest Defense Coalition (PNDC) I learned that the number of individually awarded OT contracts has nearly doubled and is closer to 250.
It seems commercial sector common sense is hitting some areas of the DoD like DIU that seems to be finding success in sustaining a small business supply chain and adopting innovation. But hodge-podge disparate systems won’t win the great power competition and it’s not an effective approach to growing the small business defense base. To stay ahead, DoD will have to integrate the lessons learned from DIU and successfully implement, communicate, and monitor a unified management approach for its small business strategy. Currently the lower number of small businesses in the DIB is an opportunity for new entrants to grab a piece of a bigger federal pie. More obligations are up for grabs for those who seek to capture them! As the DoD becomes a more attractive business partner, small and non-traditional businesses will see opportunities for growth in the federal market continue to expand.
GAO Report: Small Business Contracting October 2021 https://www.gao.gov/assets/gao-22-104621.pdf
National Defense Magazine: https://www.nationaldefensemagazine.org/articles/2020/2/11/defense-innovation-unit-shifts-into-higher-gear