The Small Business Administration’s 8(a) Business Development Program

By Kenneth Abramowicz and H. Charles Sparks

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Eligibility Criteria

The goals of the 8(a) program are to foster the success and growth of socially and economically disadvantaged businesses so that they can eventually compete without assistance. This goal is accomplished by providing eligible businesses priority for receiving federal procurement contracts.

To be eligible for this program, a business must satisfy three tests and apply for 8(a) certification. For the first test, a business must be considered a small business under the SBA’s established guidelines, which specify annual sales and total employee maximums. The guidelines are revised annually by the U.S. Department of Commerce and vary by industry classification (see www.sba.gov/size/sizetable2002.html).

The second and third tests deal with establishing that the business’ principal owners belong to a socially and economically disadvantaged group. The SBA ultimately makes these determinations, but it has identified over two dozen minority groups that it presumes are socially disadvantaged, including African Americans, Hispanic Americans, Asian Pacific Americans, and Native Americans. Individuals or groups not specifically identified as socially disadvantaged can request a determination from the SBA. The economic threshold requires only that the business owners have a net worth of less than $250,000, excluding the value of the business interest and their personal residence. A key criterion for determining a business’ eligibility is that at least one qualifying individual must hold a significant ownership interest (generally 51%) and be “engaged” in the business activities (there are exceptions for some recognized minority groups). Beyond this general standard, the program does not place restrictions on organizational form or ownership interest by nondisadvantaged owners. A recent 8(a) program modification allows qualifying 8(a) businesses to form joint ventures with nonqualifying businesses in a mentor-protégé arrangement that relaxes these ownership restrictions if benefits to the 8(a) entity can be demonstrated, usually in the form of expertise, capacity, or financing assistance.

Application Process

The application process for securing status as an 8(a) business has been streamlined and can be completed online or at a local SBA office. Completing the application carefully is important to ensure that the information requested is complete and correct. The complexity of the application process largely depends on the business’ organizational form and the number of active disadvantaged owners. The applicant company should have been in business for two years prior to the application. While not necessary, having several years of operations is consistent with the 8(a) program’s goal of nurturing a business rather than driving demand for federal procurement. Furthermore, the disadvantaged individuals should be of good character, and be current with required tax reporting. Supporting documentation includes the three most recent tax returns for both the business and individual, current financial statements for the business and individual, and a personal résumé. The SBA generally has a quick approval process (in most cases less than 90 days), and this can be expedited by request if a contracting opportunity is nearing its award deadline. Representations by the applicant are integral to completion of the 8(a) application and annual reporting requirements. Once certification is obtained, 8(a) status is valid for up to nine years.

Concurrent with the 8(a) application, a business must register at the federal Centralized Contractor Registration (CCR) website (www.ccr.gov). This registration creates a business profile on the federal database of approved contractors, providing all federal agencies and their procurement departments with information on the products and services offered by the company. A business can register in multiple industry classifications, each with its own small-business threshold level. This registration must be updated at least annually. Businesses should also register at the www.fedbizopps.gov portal to receive notification of solicitations for contracts larger than $100,000; some agencies post smaller contracts as well.

Strategies for Securing 8(a) Contracts

Finding government business opportunities requires research and effective marketing. The SBA website (www.sba.gov) provides links to several federal agency procurement forecasts. This information identifies needs at the agency level, including specific types and quantities of goods. The accuracy and timeliness of these forecasts, however, vary considerably. Some agencies utilize considerable resources for developing detailed forecasts, whereas others simply publish a list of items purchased in a typical year. The government also compiles and publishes expenditure activities by agency, type of activity, and region (https://www.fpds.gov, http://siadapp.dior.whs.mil/). These reports identify purchasing patterns by local agencies. An effective strategy for identifying contracting needs involves developing relationships with federal agency contracting personnel. Large agency offices—those spending in excess of $100 million annually—will have a dedicated staff whose job is to fill small-business “targets.” Since most agencies will not have this dedicated staff, it often requires more-frequent interaction to learn about upcoming opportunities.

Clearly, economies of scale are associated with the process of securing 8(a) status and being cognizant of government contracts that arise. Business advisors are at a competitive advantage by spreading their costs over a portfolio of clients. In addition, expertise in this area is likely to generate additional revenues from cross-selling other professional services as such clients realize success and growth.(Please see the Sidebar)

Benefits of 8(a) Status

The primary benefits afforded by 8(a) status are the ability to receive sole-source government contracts and earmarks or allocations for “competitive” awards by federal agencies and large federal projects. The first benefit is of considerable value; an 8(a) business can request that a procurement contract be sole-sourced for up to $3 million for commodities or services, or $5 million for manufacturing [certain 8(a)s are not subject to a contract ceiling]. The second benefit reflects incentives built into agency budgets that direct contract awards to qualifying businesses like 8(a) entities. Primary contractors receiving large federal awards also receive bonus payments of up to 10% of the value of subcontracts awarded to qualifying small businesses.

Another significant opportunity for 8(a) businesses is obtaining a General Services Administration (GSA) contract for its goods or services. Basically, this represents a commitment by a business to provide specific goods or services for an agreed-upon price for a fixed period of time, usually one year. This is advantageous because it identifies a business as a preferred provider for those goods and services to all federal agencies. Agencies have strong incentives to direct business to GSA contract holders because contracting officers can more easily identify suppliers, especially those considered small and disadvantaged, and the acquisitions are subject to higher no-solicitation (no-bid) thresholds. GSA will award “preferred” contractor status to businesses for every commodity classification and for each set-aside category [e.g., small, disadvantaged, 8(a), and disabled veteran].

Joint-Venture Opportunities

As mentioned above, joint-venture opportunities between qualifying 8(a) businesses and other businesses are possible under the SBA’s Mentor-Protégé Program. This program offers the chance for a larger, established business to establish a joint venture with an 8(a) entity and enjoy all of the benefits afforded 8(a) status in federal contracting. To qualify as a mentor, a business must be financially sound and profitable over the past two years and have operated in the industry (i.e., provided goods and services) related to the federal awards being sought. This should be a bona fide relationship that provides tangible benefits to the protégé company (e.g., managerial expertise, contracting experience, capacity, or financial resources). Mentors can even hold a significant ownership interest in a protégé company, up to a 40% equity stake plus other financing. The relationship must be for a term of at least one year, but is cancelable at any time by either party.

Partnering with an eligible 8(a) business can provide significant long-term financial rewards to both parties. As the protégé matures, experiencing growth and profitability, the value of the mentor’s financial interest grows accordingly. For an example of how this relationship might be initiated, consider a federal agency that announces an upcoming award for services. A potential mentor could locate existing 8(a) businesses by searching the CCR website to identify registered contractors by product-code classification. CCR registration indicates if a business holds 8(a) certification, as well as the key officers and contacts for that business. This information enables a potential mentor to initiate contact with a potential protégé company to explore whether there is mutual interest in forming a procurement relationship. Priority for sole-source contracting and other earmarks are available to the joint venture as if it were a qualifying 8(a) entity for the life of the venture or until the business grows larger than 50% of the size limit for its respective industry. Growth would affect only future contracting awards, not existing business. All of the aforementioned strategies for finding federal contracts that are available to 8(a) businesses are also available to the joint venture.

A Valuable Strategy

Attaining 8(a) status under the SBA’s 8(a) Business Development program qualifies a business for preferential treatment in the lucrative arena of government contracting. As a result, securing 8(a) status is a valuable strategy that affords a small business significant contracting opportunities during its growth stages. The effort invested learning about the 8(a) program and local federal procurement activities may result in a profitable business niche.