Tag Archives: SBA size standards

SBA OHA: Subcontractor Costs Cannot Be Excluded From Receipts

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I’m a government contracts lawyer these days, but when I was much younger, I was a would-be prime contractor.  During my senior year of high school, I took a part-time job at the Grand Forks Herald, my hometown newspaper in North Dakota.  Flush with cash (at least compared to where I’d been before), I then attempted to subcontract my household chores—things like taking out the trash and feeding the dog—to my younger brother.

My parents put the kibosh on that one, explaining that as a member of the family, I needed to personally contribute some labor to it (as a dad now, I can see where they were coming from).  But imagine I had been successful, paying Pete, say, $20 weekly to toil on my behalf for the Koprince household.  Could I have told the IRS, come tax season, that the money I paid Pete didn’t count toward my income, because I passed it through to him?

“Of course not,” you’re probably saying, and you are right.  And, on a much larger scale, the same is true when it comes to a small government contractor’s subcontract costs.  As the SBA Office of Hearings and Appeals has held, all of a company’s receipts—with very limited exclusions—count toward its size under a revenue-based SBA size standard.  Just because you subcontract a portion of a government contract to another company does not mean that the money you pay your subcontractor doesn’t count toward your own receipts.

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SBA OHA: Inactive Employees Count for SBA Size Purposes

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Back in my undergraduate days at Duke, I attended almost all of the home basketball games.  Occasionally, sometime in the second half, with the Blue Devils up 20 points or more, an opposing player would execute an impressive dunk, and proceed to do a little celebration.  I, along with my fellow Cameron Crazies, would immediately begin chanting, “scoreboard, scoreboard,” while pointing at the device in question.  Our message was, “that’s nice, but it just doesn’t matter.”  (Actually, we Crazies sometimes chanted “just doesn’t matter,” too).

“That’s nice, but it just doesn’t matter” is what the SBA’s Office of Hearings and Appeals had to say in a recent size appeal decision involving the question of whether employees who are sick, on vacation, or even comatose count toward a company’s employee-based SBA size standard.  SBA OHA’s answer: if they’re on the payroll, they count.  Period.

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Subcontractors, NAICS Codes and Small Business Status: The Prime Decides

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George W. Bush famously declared himself to be “the decider.”  Although some comedians had fun with the phrase, it’s hard to argue with Bush’s underlying assessment; as head of the government, the President has a lot of decisions to make.  But when it comes to whether you qualify as “small” for purposes of a federal subcontract, it may surprise you to learn that the government isn’t the decider at all.

For a subcontract, the prime contractor—not the government—decides what NAICS code (and corresponding size standard) applies.  The NAICS code the prime contractor selects for your subcontract need not be the same NAICS code assigned to the prime contract as a whole, and you may have the opportunity to lobby the prime contractor to change the NAICS code to one you believe is better-suited for the procurement–and your small business eligibility.

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