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Avoiding Common Misconceptions About Calculating
Small Business Status
Qualifying as a small business for purposes of federal government contracting requires a contractor to compare its average annual receipts or average employee count to the size standard associated with a particular North American Industry Classification System (NAICS) code. For contractors in the construction and service industries, which generally use receipts-based size standards, there are two common misconceptions about which dollars count toward the contractor’s average annual receipts. Let’s take a closer look.
First, contractors sometimes believe that revenues generated under one NAICS code only apply to a company's size under that NAICS code.
For example, a company might assume that if it is awarded a contract under NAICS code 236220 (Commercial and Institutional Building Construction), the revenues generated under that contract only apply to the company's size status for that single NAICS code. If the company bids on a contract under another NAICS code, like 238140 (Masonry Contractors), the assumption is that the revenues generated under the first contract don't count toward the company's small business size for the second.
Second, contractors sometimes believe that only revenues generated by government contracts count toward the contractor’s small business status. For example, a contractor with $15 million in commercial sales and $20 million in government sales might believe that only the $20 million counts.
The U.S. Small Business Administration’s size regulations, however, do not exclude revenues generated in other NAICS codes or under commercial contracts. In fact, SBA's regulations start with the presumption that "all revenue in whatever form received or accrued from whatever source" counts toward a company's small business size status under receipts-based NAICS codes. While there are exceptions, they are quite limited, such as allowing a travel agent to exclude revenue collected on behalf of another entity, like an airline or hotel.
These assumptions also make little practical sense in terms of ensuring that only genuinely small businesses are eligible for federal small business contracting preferences. If contractors could exclude receipts based on the NAICS code in which they were generated or based on the non-governmental nature of the customer, it would open the door for large businesses–even multi-billion dollar multinational corporations–to qualify as “small” in certain circumstances. That, of course, is not a result the SBA wants.
The bottom line is that when it comes to counting average annual receipts, most revenue counts toward a contractor’s small business status. There are no exceptions based on what NAICS code the revenue was generated under or whether the customer was non-governmental. Contractors who are uncertain about whether some of their revenues may be excludable should review the SBA’s regulation at 13 C.F.R. 121.104.
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