Small Business Scramble

As the government looks to redefine small business, the field for federal contracts may be growing wider.

A distributor’s sales force works hard to win—and keep—customer accounts, often vying to outsmart and out-service the other guys in town. Now imagine if the number of distributors in that town were to suddenly double overnight. Distributors bidding on government contracts could be facing a similar plight in the near future, as the Small Business Administration (SBA) looks to redefine what qualifies a firm as small.

The federal government is one of the world’s largest customers, buying goods and services in excess of $425 billion per year. Among these purchases are gases, hardgoods, service and training that gases and welding distributors provide. To level the playing field between large and small businesses, the government offers many procurement opportunities exclusively to small businesses. In fact, federal agencies are required by law to set contracting goals with at least 23 percent of buying being targeted at small companies. However, small businesses are now facing a changing landscape as the SBA carries out its ongoing comprehensive review of size standards.

In its examination of size standards, SBA is revising the North American Industry Classification System (NAICS) codes, which ascribe a maximum limit, either by number of employees or average annual receipts, for qualifying small businesses (See the SBA’s Table of Small Business Size Standards). The SBA review encompasses every private sector in the U.S., calculated based on data from the 2007 County Business Patterns and the 2007 Economic Census. The most recent proposed adjustments, which would affect the professional, technical and scientific services sectors, saw many requirements double—or more. For example, qualifying businesses in engineering services jumped from $4.5 million in average annual receipts to $19.0 million.

Earlbeck Gases & Technologies, located in Baltimore, MD, has done business with Uncle Sam for many years, providing gases, equipment and training and certification. “It’s a moving target,” says President Jim Earlbeck of the changing size standards. Earlbeck, whose company employs 30 people, recently found out that his company no longer qualifies as “small” for a contract the company had held for 25 years. “We were pursuing a contract at an end-user facility for repairs and maintenance of welding equipment. We found that we were no longer classified as a small business for that NAICS code. We were stunned to find that we no longer qualified.”

A regional manager at another distributorship who wishes to remain anonymous says a review of industry size standards is fair. “In our industry, there has been a lot of consolidation. It seems like gases and welding distributors are getting bigger,” he says, “and there are fewer small businesses by traditional standards.” The SBA notes in its review of Sector 81 (other services) that the last overall review of size standards occurred during the late 1970s and early 1980s. “Technology, productivity growth, international competition, mergers and acquisitions and updated industry definitions may have changed the structure of many industries,” reads the final rule.

Earlbeck says the small business designation does make a difference. “Having small business status keeps the larger companies from competing against us.” In some cases, however, larger companies have found their way into the competition. “I have seen cases where a company was not aware of the requirements, so they check the box to indicate that they are a small business,” says Earlbeck. “When they are awarded the contract, we have to go through several government agencies to file a protest.”

Some of the confusion may come from having different standards for different applications. A distributor may qualify as a small business for industrial gas manufacturing (NAICS 325120), which currently allows for 1,000 employees, but not for the industrial supplies merchant wholesalers industry (NAICS 423840), which permits 100 employees.

With the SBA’s comprehensive review, these numbers may soon change. Exactly where the SBA will draw the line for gases and welding distributors is yet to be seen.

To learn more about working with the U.S. government, read “Doing Business with Uncle Sam.”

Gases and Welding Distributors Association