By Michelle Litteken
It is a new year, and this is the perfect time for a small business to consider whether it still qualifies as a small business. We recommend that small businesses assess their size at least once a year. Because eligibility under a revenue-based size standard is based on a company’s average revenues from the most recently completed three fiscal years, and those revenues generally establish a company’s size for the entire upcoming year, the beginning of a new fiscal year is a good time to reevaluate one’s size.
When a contractor submits a proposal, its size is determined on the date of proposal submission. For solicitations with an employee-based size standard, this is generally a straight forward exercise because a company’s size is based on the number of employees for each of the preceding completed 12 calendar months. It is more challenging to determine a company’s size at the start of a new year under a revenue-based size standard because a contractor often has not finalized its financials from the prior year. If a contractor’s average revenues are close to a given size standard threshold, the contractor may be uncertain as to whether it still qualifies as a small business when a new fiscal year begins. Understanding how SBA determined a company’s size can help a contractor decide whether to submit a proposal.
As noted above, SBA calculates a business’ size using the revenues received in the three prior fiscal years. See 13 CFR 121.104(c). Thus, for a proposal submitted in January 2017, if the company uses the calendar year for its fiscal year, SBA would look at the company’s revenues from 2014, 2015, and 2016. The average of those three years would determine whether the company qualifies as small under a particular size standard. In most cases, SBA obtains annual revenue information from tax returns. See 13 CFR 121.104(a)(1). However, if a contractor is submitting a proposal in early 2017, it probably has not prepared its 2016 tax return yet. With no tax return, how will the contractor’s size be calculated?
First, it must be said that if a company has not yet filed its tax return for the prior year, this does not mean that year will be excluded from the calculation. If a tax return has not been filed for a fiscal year, SBA will examine a company’s internal records, such as financial statements, to determine the revenues from the recently-completed year. See 13 CFR 121.104(a)(2). Accordingly, a contractor should use its best efforts to ensure that its financial statements are accurate and determine whether it is a small business under the applicable size standard before the tax return is filed. If a contractor is close to the size standard provided in a solicitation, it should carefully review its financial records before submitting a proposal to ensure it is below the size standard. If the contractor is selected for award, a disappointed offeror could file a size protest. If the SBA determines that the awardee is not small, the awardee will lose the contract and could be precluded from bidding on other contracts under the same size standard until it can prove to SBA that it is small. If the contractor’s average revenues were clearly over the size standard, the Government could take the position that the contractor intentionally or recklessly misrepresented its size and pursue fraud charges.
These problems can be avoided by reassessing one’s size at the start of a new year and submitting a proposal only if the applicable size standard is met. We advise contractors to verify their size under revenue thresholds at least once a year, preferably at the beginning of a fiscal year. Doing a size check-up now could help you avoid problems in the future.
About the author: Michelle Litteken is an associate with PilieroMazza in the Government Contracting and Litigation law groups. She may be reached at mlitteken@pilieromazza.com.