Why Are Small Federal VARs Up In Arms?
Small-Business Cutoff Lowered
In a nutshell, the Footnote 18 exception of the North American Industry Classification System (NAICS) Code 541419 sets the definition of a small VAR as 150 employees or fewer. If the footnote is removed, as the Small Business Administration (SBA) is proposing, a small VAR could only be defined as having $27.5 million in revenue or less, the alternative option also allowed in the exception. The SBA told CRN that the rule change would help simplify and provide consistencies in the federal contracting process.
Why Are VARs Upset?
Small federal VARs say that removing the footnote exception setting a small business as 150 employees or less would lose them millions, and some are saying it will put them out of business. The reason, they told CRN, is that losing their small-business classification would mean they would be competing head-to-head for federal contracts with industry giants such as CDW, Hewlett-Packard and IBM. Some VARs pointed out that big business also could lose, as they often partner with smaller VARs to gain contract wins.
This Isn't The First Time
This isn't the first time that the exception has been under fire. In 2002, when the employee cutoff was 100 for IT VARs, the SBA proposed changing the size standard to 500 employees. That change was shot down in December 2003 and a compromise size standard of 150 employees was put in place under NAICS Code 541519. The revenue size standard has also been on the rise, starting at $19 million, rising to $25 million in 2011 and finally $27.5 million in June of this year.
Why Is This Rule Here In The First Place?
"SBA's size standards and program eligibility requirements do not specifically address the classification of federal contracts that combine services with the acquisition of supplies. As a result, federal agencies have had difficulty using small business preference programs for these types of contracts, especially for IT," the SBA said in 2002.
Show Me The Numbers
The possible removal of the exception is based on the most recent 2007 census data, which SBA representatives said showed that the exception was no longer necessary as most of the companies between 45 and 150 employees would still qualify as a small business under the new revenue cutoff. However, VARs said that they think it will have drastic effects on federal contracts. Lloyd Chapman, president of the American Small Business League, estimates that the typical federal reseller makes between $2 million and $3 million in revenue per employee, instead of the $140,000 in revenue the rule change would suggest.
Another Possible Update Pending
The possible changes will just keep coming. SBA officials told CRN that they would re-evaluate the rule again early next year as 2012 census data becomes available. They said that the data would become available to them in early 2015, and until then they are basing their decisions off the most recent 2007 census data.
What Contracts Will It Affect?
While the change won't affect contracts that already have been awarded, it will have an effect on upcoming contracts if the rule change were to go through, said Jim Fontana, partner at Dempsey Fontana, a Reston, Va.-based law firm that specializes in federal contracting for IT VARs. VARs would not lose contracts already won, he said, but if they were to renew or apply for a new contract, the rule change could affect their ability to win the deal. However, other VARs worried that a re-representation of a contract down the road could also strip them of the contracts they already hold.
Upside Of The Change
According to the SBA, the removal of the exception will help cut back on complexity and create consistency in the federal contracting process. There already are more than 1,100 codes that help determine different size standards and other factors, according to SBA officials, who said that the complexity of the process has caused a lot of problems for award management as it is tough to determine what is defined as a small business.
"Government contracting is so complex. I think anything you can do to simplify it, that helps the general public," Ken Dodds, associate administrator for the Office of Policy and Planning at the SBA, said.
Open For Comments Until Nov. 10
The changes aren't official yet. The government is accepting public comments on the NAICS Code 541519 footnote changes until Nov. 10. Anyone can submit comments through the group's website until that time. After Nov. 10, a decision will be made based on the SBA data and the public comments submitted.
Petition, Letters, Hashtag, Injunction
Small federal VARs that feel this rule change will negatively affect their business are working hard to make sure their voice is heard. They are attacking the potential exception removal from a variety of angles, including a petition, letter-writing campaign and a #SaveFootnote18 hashtag to get the word out. If the change goes through, groups such as the American Small Business League plan to file an injunction to get it removed after the fact.