What contractors need to know as they approach the size threshold for “small business” for their NAICS code.
For most businesses, growth is a great thing and increased revenue is an opportunity for celebration. For businesses contracting with the government, however, growth beyond a certain point can lead to headaches.
In U.S. federal government contracting, the transition from a small business to a larger business occurs when a company outgrows the size standards set by the Small Business Administration (SBA) for its primary North American Industry Classification System (NAICS) code.
When a company surpasses the established size standards, it is no longer considered a small business for federal contracting purposes. The specific size standards vary based on the industry, measured by metrics such as average annual revenue or number of employees.
Why do size standards vary by industry?
The specific size standards for different industries in federal contracting are determined based on several factors that reflect the unique characteristics and economic realities of those industries. Here are a few reasons why size standards can vary across different sectors:
1. Industry Characteristics:
Capital Intensity: Some industries require significant investment in equipment and facilities, making it harder for smaller businesses to compete. Size standards are adjusted to reflect these capital-intensive industries.
Labor Intensity: Industries that rely more on labor than capital might have lower size standards, as smaller businesses can compete effectively based on their workforce.
2. Market Dynamics:
Market Concentration: Industries with a few large players might have higher size standards, allowing smaller businesses to participate without being overshadowed by major corporations.
Competitive Landscape: Industries with many small players but fierce competition might have lower size standards, promoting fair competition among businesses of similar sizes.
3. Economic Impact:
Job Creation: Supporting small businesses can be a strategy to stimulate job creation. Lower size standards in certain sectors encourage more businesses, potentially leading to more employment opportunities.
Local Economies: Small businesses often have a significant impact on local economies. Lower size standards in sectors vital to local economies can foster community development.
4. Technological Requirements:
Technological Advancements: Industries requiring cutting-edge technology or significant research and development might have higher size standards to accommodate the costs associated with innovation.
5. Historical Precedence:
Legacy Size Standards: Historical data and previous size standards also influence the current standards. Over time, adjustments are made based on industry performance, economic shifts, and market demands.
6. Regulatory Considerations:
Regulatory Environment: Different industries operate under various regulations. Size standards might be adjusted to align with regulatory requirements, ensuring compliance and fair competition within legal frameworks.
7. Global Competitiveness:
Global Market: For industries competing globally, size standards might be adjusted to help businesses remain competitive on an international scale.
Overall, the aim of setting industry-specific size standards is to create a level playing field, allowing businesses of similar capacities and resources to compete fairly for government contracts. The standards are periodically reviewed and adjusted to reflect changes in the economy, technology, and market dynamics, ensuring they remain relevant and supportive of small businesses.
Once a business exceeds the size standards, it is often referred to as a "large business" in the context of federal contracting. Moving from a small business to a large business can impact the company's eligibility for certain set-aside contracts and preferential treatment in federal procurement.
Key challenges (and smart solutions) for government contractors growing out of their small business NAICS code
Transitioning from a small business to a large business can present several challenges. Here are some of the main challenges government contractors face during this transition, and some proposed solutions for addressing these issues:
1. Increased Competition:
Challenge: Larger businesses face intense competition from other well-established firms in their industry. They must contend with other large businesses that often have substantial resources, experience, and brand recognition.
Solution: Large businesses need to focus on showcasing their unique value propositions, innovative approaches, and exceptional qualifications to stand out among competitors. A strong LinkedIn presence is a great way to punch above your weight and go toe-to-toe with larger competitors.
2. Complex Procurement Processes:
Challenge: Larger contracts often come with more intricate and bureaucratic procurement processes. Handling complex government requirements, compliance issues, and documentation can be challenging.
Solution: Businesses need to invest in experienced proposal teams and legal advisors who understand the complexities of government contracts. Training employees on government procurement procedures is also crucial.
3. Proposal Volume and Detail:
Challenge: Larger contracts require more detailed and comprehensive proposals. Businesses must invest significant time and effort into crafting extensive documents that meet the government's requirements.
Solution: Large businesses should establish dedicated proposal teams or departments with experienced writers, project managers, and subject matter experts. Investing in professional proposal development tools and training can also enhance the quality of proposals.
4. Past Performance:
Challenge: Large businesses are often evaluated based on their past performance on similar contracts. Demonstrating a successful track record in delivering projects on time and within budget is critical.
Solution: Maintaining a strong record of past performance is essential. Businesses should actively manage and document their projects, ensuring timely delivery, high-quality work, and positive client relationships. Again, leveraging social media – especially LinkedIn – is a great way to share these success stories with government agencies.
5. Collaboration and Communication:
Challenge: Larger businesses often have multiple departments and teams working on different aspects of proposals. Effective collaboration and communication can become challenging.
Solution: Implementing streamlined communication channels, project management software, and regular team meetings can enhance collaboration. Clear communication and coordination between departments are essential.
6. Cost and Resource Management:
Challenge: Preparing detailed proposals requires significant resources, including skilled staff, time, and sometimes external consultants. Managing these costs while ensuring the quality of proposals is a challenge.
Solution: Effective resource management, budget allocation, and strategic planning are crucial. Businesses need to balance their investments in proposal development with the potential returns from winning contracts.
7. Adaptability and Innovation:
Challenge: Staying innovative and adaptable while dealing with the bureaucratic nature of government contracts can be difficult for large businesses.
Solution: Encouraging a culture of innovation, investing in research and development, and staying updated with industry trends can give large businesses a competitive edge.
8. Networking and Relationships:
Challenge: To be successful, large businesses need to build strong relationships with government agencies and prime contractors.
Solution: Establishing a good reputation and a network of contacts can lead to more contract opportunities. LinkedIn is a great way to expand your network and build relationships.
Overcoming these challenges requires a combination of strategic planning, skilled workforce, efficient processes, and a deep understanding of both the industry and the government contracting landscape.
Thinking ahead: Preparing for a transition away from a small business NAICS code
Here are some proactive steps a small business can take to set themselves up for success:
1. Strategic Networking and LinkedIn Presence:
Build a Strong LinkedIn Profile: Develop a professional LinkedIn profile highlighting your expertise, achievements, and capabilities. Regularly update your profile with relevant content.
Connect with Industry Leaders: Connect with key influencers, government officials, and industry leaders on LinkedIn. Engage in conversations, share insights, and participate in relevant groups and discussions.
Share Thought Leadership: Publish articles, posts, and case studies showcasing your expertise. Share valuable insights about industry trends, best practices, and successful projects.
Participate in Events: Attend industry conferences, seminars, and workshops. Engage with fellow attendees, speakers, and exhibitors. After the events, connect with them on LinkedIn to maintain the relationship.
Request Recommendations: Request recommendations from clients, partners, and colleagues who can vouch for your skills and reliability. Positive recommendations on LinkedIn can enhance your credibility.
Read our case study: See how we helped Maximus use LinkedIn to change their brand perception among federal buyers.
2. Diversify and Strengthen Capabilities:
Assess Capabilities: Evaluate your current strengths and weaknesses. Identify areas where your business can expand its capabilities to meet the demands of larger contracts.
Invest in Training: Provide training to employees to enhance their skills and knowledge. Continuous learning keeps your team updated with industry best practices.
Develop Partnerships: Form strategic partnerships with complementary businesses. Collaborate on smaller projects to build a joint track record that can be showcased in proposals.
3. Strategic Business Development:
Market Research: Conduct thorough market research to identify upcoming opportunities and trends in your industry. Understand the government agencies' needs and priorities.
Pipeline Management: Develop a robust business development pipeline. Identify potential contracts, build relationships with contracting officers, and track upcoming solicitations.
Customer Relationship Management (CRM): Implement a CRM system to manage client relationships, track communications, and identify potential opportunities.
4. Financial Planning and Compliance:
Financial Health: Ensure your financial records are in order. Maintain a healthy cash flow, manage debts, and demonstrate financial stability.
Compliance and Certifications: Stay updated with regulations and certifications. Ensure your business complies with all relevant standards and regulations applicable to your industry.
5. Operational Efficiency:
Process Optimization: Streamline your operations and project management processes. Implement efficient tools and software for project tracking, accounting, and proposal management.
Quality Assurance: Implement robust quality assurance processes. Deliver high-quality services to clients to build a strong reputation.
6. Legal and Contractual Considerations:
Legal Review: Have legal contracts and agreements reviewed by experts. Ensure all contracts, especially subcontracting agreements, are favorable to your business.
Intellectual Property Protection: Protect your intellectual property rights. This can be a valuable asset as your business grows.
7. Build a Strong Team:
Leadership Development: Invest in leadership development within your organization. Strong leadership is crucial for guiding the company through growth.
Talent Acquisition: Recruit skilled professionals who can contribute to your company's growth and success.
By taking these proactive steps and leveraging platforms like LinkedIn for professional networking and brand building, small businesses can position themselves strategically for the transition to larger government contracts. Building a strong professional network, maintaining a positive online presence, and showcasing your expertise can create valuable opportunities and relationships for your business.
Our government marketing experts at Lumino can help with LinkedIn. Learn more.
