Calculating Size; What is a Manufacturer?

Updates and Opinions on Timely Topics Impacting the Government Contracting Industry from GovCon Expert Ken Dodds

Calculating Annual Receipts or Number of Employees for Size Purposes

To qualify as a small business for a government contract a firm must not exceed the size standard that corresponds to the NAICS code assigned to the procurement. Under a receipts-based size standard, a firm’s size is determined based on the firm’s average receipts over the five most recently completed fiscal years (total receipts over five years divided by five).[1] Generally, receipts are calculated based on total income plus costs of goods sold as reported on a tax return.[2] For employee-based size standards, a firm’s size is calculated based on the average number of employees over the previously completed 24 calendar months.[3] SBA will use IRS criteria to determine whether an individual is an employee.[4] As a court recently noted, a firm cannot qualify as a small business based on false tax returns.[5] The court found for purposes of the False Claims Act that the firm had excluded reimbursements for purchases made at a customer’s request from its receipts in violation of SBA’s regulations.[6] It is unclear whether the firm could legally exclude the reimbursements for federal tax purposes. Simply because a firm excluded revenue on a submitted tax return does not mean that the IRS accepts or agrees with the exclusion. Similarly, a firm cannot qualify as a small business under an employee-based size standard simply because it claims individuals are not employees for income tax purposes. The fact that the information has been submitted to the IRS does not mean that the IRS agrees with the firm’s independent contractor classification.[7]

Insufficient Proof of “Own Facilities”

Under a small or socioeconomic set-aside for supplies, an offeror must qualify as a manufacturer or nonmanufacturer.[8] A nonmanufacturer has 500 employees or less, operates in the retail or wholesale trade, takes ownership or possession of the item in a manner consistent with industry practice, and supplies the product of a small business made in the United States unless SBA has issued of a waiver of this requirement because no small manufacturer exists.[9] For size determination purposes there can only be one manufacturer of an item. The manufacturer is the concern which, with its own facilities, transforms substances or assembles parts or components into the end item.[10] Under OHA caselaw, a firm does not have to own the manufacturing facilities to qualify as a manufacturer. A firm can lease facilities and qualify as a manufacturer.[11]

In a recent OHA decision involving a small business set-aside for the acquisition of ships, the apparent successful offeror did not own a shipyard, but had a teaming agreement with a shipyard. The Area Office found that the firm qualified as a small business, but on appeal OHA remanded to the Area Office.[12] OHA found that although a fully executed lease need not exist at the time of offer, there must be an explicit written agreement to occupy and control the facilities needed to manufacture the end item. OHA found the teaming agreement and proposal insufficient. Interestingly, OHA found that the Area Office did not err when it used the date of initial offer including price to determine whether the apparent successful offeror qualified as a manufacturer. However, on remand, OHA directed the Area Office to determine size on the date of final proposal revision as required for protests involving compliance with the nonmanufacturer rule.[13]

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[1] 13 CFR 121.104(c).

[2] 13 CFR 121.104(a).

[3] 13 CFR 121.106(b).

[4] 13 CFR 121.106(a).

[5] United States ex rel. Bid Solve, Inc. v. CWS Mktg. Grp., Inc., 2023 WL 3521616 at p. 7 (D.D.C. 2023).

[6] Id. at p. 6.

[7] Robert W. Wood, Independent Contractor vs. Employee and Blackwater, 70 Mont. L. Rev. 95 (Winter 2009).

[8] 13 CFR 121.406(a), (c) (excluding small business set-asides below the simplified acquisition threshold).

[9] 13 CFR 121.406(b).

[10] 13 CFR 121.406(b)(2).

[11] Size Appeal of Mistral, Inc., SBA No. SIZ-5877 (2018).

[12] Size Appeals of Master Boat Builders, Inc. Steiner Construction Company, Inc., SBA No. SIZ-6198 (2023), recons. denied SBA No. SIZ-6209 (2023) (PFR).

[13] 13 CFR 121.404(d).?