August 23, 2023 By: Michael L. Gentry Table of Contents Table of Contents Introduction A Primer on SBA Standards The Impact of SBA Standards on the Construction Industry Contract Eligibility and SBA Standards Balancing Growth and Eligibility Financial Structuring and SBA Standards Billing Costs, Contract Reimbursements, and SBA Standards Audit Processes and SBA Standards Navigating SBA Standards Changes to SBA Standards and Their Impact on the Construction Industry How KatzAbosch Can Help Key Takeaways Anybody who works with government agencies knows how important it is to keep a keen eye on the changes to regulations and standards. A critical factor for many companies is the Small Business Administration (SBA) standards, which define the parameters for a business to qualify as “small.” This classification can significantly impact Government Contractors (GovCons), particularly within the construction industry. A Primer on SBA Standards The SBA, a United States government agency, provides support to entrepreneurs and small businesses. A key aspect of their role involves defining what constitutes a “small” business. This definition, known as the SBA size standards, is not one-size-fits-all. It varies by industry, generally based on the number of employees or the amount of annual receipts a business has. To understand these standards, you need to know a few terms. “Affiliates” refers to businesses that are linked by the power to control, whether exercised or not. This power typically exists when an external party has 50% or more ownership. “Annual receipts” are the total income plus the cost of goods sold, averaged over the business’s latest five complete fiscal years. The “employee calculation” is the average number of people employed for each pay period over the business’s latest 24 calendar months. These standards play a pivotal role in determining whether a business qualifies to participate in government contracting programs and compete for contracts reserved or set aside for small businesses. Understanding and meeting these standards is a crucial first step for any GovCon aiming to secure government contracts. The Impact of SBA Standards on the Construction Industry The construction industry, with its unique dynamics and high-stakes projects, is significantly affected by SBA standards. These standards influence a multitude of factors, from the eligibility for contracts to the financial structuring of construction firms. Contract Eligibility and SBA Standards The construction industry, with its unique dynamics and high-stakes projects, is significantly affected by SBA standards. These standards influence a multitude of factors, from the eligibility for contracts to the financial structuring of construction firms. One of the primary impacts of SBA standards on construction GovCons is in the realm of contract eligibility. The SBA standards determine whether a construction firm qualifies as a ‘small’ business and is thus eligible to compete for contracts reserved for such businesses. Balancing Growth and Eligibility However, these standards also present unique challenges. For instance, a construction firm that grows and expands may find itself no longer classified as ‘small’ according to SBA standards. This could potentially result in the loss of eligibility for certain contracts, impacting the firm’s growth trajectory and business strategy. Financial Structuring and SBA Standards SBA standards also influence the financial structuring of construction firms. The standards around annual receipts and employee calculations can affect how construction firms manage their finances and human resources. Billing Costs, Contract Reimbursements, and SBA Standards Moreover, the SBA standards can impact the billing costs and contract reimbursements in the construction industry. The standards around ‘affiliates’ and ‘annual receipts’ can influence the overhead rate a construction firm is entitled to use for billing costs. Audit Processes and SBA Standards Additionally, the SBA standards can have implications for a construction firm’s audit processes. Construction firms must often undergo overhead rate audits to verify the overhead rate they are entitled to use for billing costs. Navigating SBA Standards Navigating these challenges requires strategic planning and a deep understanding of SBA standards. Construction GovCons may need to adopt specific strategies, such as compliance support and audit liaison services, to ensure they meet these standards. They might also need to explore solutions to common challenges, such as indirect cost modeling and accounting system compliance. Changes to SBA Standards and Their Impact on the Construction Industry In 2013, the U.S. Small Business Administration (SBA) made significant changes to the small business size standards in the North American Industry Classification System (NAICS) Sector 23, Construction. Specifically, the SBA increased the size standards for NAICS 237210, Land Subdivision, from $7 million in average annual receipts to $25.5 million. Additionally, the size standards for Dredging and Surface Cleanup Activities, a sub-industry category under NAICS 237990, Other Heavy and Civil Engineering Construction, were increased from $20 million to $25.5 million. These changes have had a profound impact on the construction industry. The increase in size standards has allowed more construction firms to qualify as ‘small’ businesses, thereby expanding their eligibility for contracts reserved for small businesses. This has provided a significant boost to many construction firms, enabling them to compete for and secure contracts they might not have been eligible for under the previous standards. As the size standards increase, construction firms that were previously considered ‘medium’ or ‘large’ may now qualify as ‘small.’ This could potentially intensify competition for contracts reserved for small businesses, making it more difficult for truly small firms to secure these contracts. The increase in size standards could potentially impact the financial structuring of construction firms. With a higher threshold for what constitutes a ‘small’ business, construction firms may need to adjust their financial strategies and resource allocation to ensure they remain competitive. While the recent changes to the SBA standards have provided opportunities for some construction firms, they have also introduced new challenges. It’s crucial for construction firms to stay informed about these changes and adjust their strategies accordingly to ensure they can compete effectively in this evolving landscape. HOW KATZABOSCH CAN HELP Understanding and navigating the SBA standards is crucial for GovCons in the construction industry. These standards not only determine contract eligibility but also influence financial structuring, billing costs, and contract reimbursements. As such, they play a significant role in shaping the success and growth of construction GovCons. If you’re a GovCon in the construction industry seeking to navigate these standards, KatzAbosch can help. With our deep expertise and commitment to providing high-quality accounting and consulting services, we can guide you through the complexities of SBA standards. To learn more about how KatzAbosch can help your business navigate SBA standards, contact us today. Key Takeaways Understanding SBA Standards: The Small Business Administration (SBA) standards define what constitutes a ‘small’ business, which is crucial for government contractors (GovCons) in the construction industry. These standards vary by industry and are generally based on the number of employees or the amount of annual receipts a business has. Impact on Contract Eligibility: SBA standards determine whether a construction firm qualifies as a ‘small’ business and is thus eligible to compete for contracts reserved for such businesses. However, as a firm grows and expands, it may no longer be classified as ‘small,’ impacting its eligibility for certain contracts. Influence on Financial Structuring: SBA standards can affect how construction firms manage their finances and human resources. Firms may need to strategize their hiring practices or financial management to ensure they stay within the SBA size standards and retain their ‘small’ business status. Billing Costs and Contract Reimbursements: The SBA standards can impact billing costs and contract reimbursements in the construction industry. Understanding these nuances is crucial for construction firms as they negotiate contracts and plan their project budgets. Audit Processes: SBA standards can have implications for a construction firm’s audit processes. Construction firms must often undergo overhead rate audits to verify the overhead rate they are entitled to use for billing costs. Changes to SBA Standards: The SBA periodically adjusts its size standards, which can have a profound impact on the construction industry. These changes can provide opportunities for some construction firms, but they can also introduce new challenges. Navigating SBA Standards with KatzAbosch: KatzAbosch can guide GovCons in the construction industry through the complexities of SBA standards. With deep expertise and a commitment to providing high-quality accounting and consulting services, KatzAbosch can help firms navigate these standards effectively. Article by: Michael L. Gentry, CPA, CCIFP, CCA Michael Gentry, a Director with KatzAbosch, joined the firm in 1998. Mike serves on the firm’s Board of Directors and as Co-Chair of the Construction Services Group. He has provided accounting and tax services to contractors and construction firms for more than 15 years. In addition, he services closely-held businesses. A dedicated professional, Mike holds the prestigious distinction of Certified Construction Industry Financial Professional (CCIFP), a certification held by less than 50 professionals in Maryland and less than 1,000 professionals in the United States. He is also a CCA, certified construction auditor. This nationally recognized certification is sponsored by the National Association of Construction Auditors. By applying his knowledge of the latest trends and changes in the construction industry, he helps clients achieve their financial and personal goals.
