Understanding How Small Business Size Standards Work
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Understanding How Small Business Size Standards Work

Small business size standards and benefits that help to qualify for federal government contracts.

How do you know your company is a small business?  And who or what ensures the benefits are accurate and current for a small business doing business with the federal government?

Development of size standards

Initially the small business standard was based on the number of employees a company had working and a flat 500 employee standard was established for all government contracts.  Since companies vary from industry to industry it became impossible to define small business merely by employee count, dollar volume of business or their amount of capitalization.  These issues made it difficult to fit all small companies into a single standard, so over the years small business considerations have been evaluated and reviewed.

Although today’s size standards are still connected to the historical definitions we’ve come a long way when considering characteristics to the different industries, using a broader range of size standards to accommodate those industries.  One of the changes occurred in January 1997, when the North American Industry Classification System (NAICS) codes replaced the Standards Industrial Classification (SIC) codes.

Small business disparities

The Small Business Act instigated the support for small businesses, ensuring that a fair share of federal contracting would be awarded to small business.  One of the qualifiers used when soliciting federal government contracts is the small business size standards.

Federal government offices rely on Census reports to provide information about business markets that may be dominated by larger business.  Reports reflecting small businesses with the attributes to provide equivalent services, suggest adjustments or reconsiderations for review and evaluation by the appropriate committees to maintain fair economic competition. 

Contract offices of the federal government use the size standards and from time to time will issue a "sources sought solicitations" looking for small qualified businesses in their community.  Getting started as a small business in the industry of government contracts can be exhausting and successful even with the disparities that may exist between the small business federal market and the small business private market.

An example of the disparities, are the different skill sets that are exclusively used in federal environments and may be required by Federal government contracts as a pre-qualifier. This prerequisite may make the competition tougher but not impossible. 

Summary

Size standards are used by the federal government to determine small companies from companies not small, even though they share the same NAICS code.  Additionally, other business characteristics such as its internal structure are used to determine a company size.  The federal government wants to know; is the company independently owned and operated, how is the operating capital managed and who makes the principles decisions for the business.

Source: Small Business Administration, U.S. Dept. of Commerce, Census Bureau: Statistics of U.S. Businesses and Business Dynamics Statistics

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