Although roofing contractors often perform work on local government buildings, schools, libraries and other public buildings, many contractors are unaware of the opportunities and benefits the federal government offers to companies with less than $13 million in annual receipts.
For example, in fiscal year 2004, the federal government awarded nearly $70 billion in contracts to promote the growth of small businesses. More than $10 billion went to small disadvantaged businesses (SDBs), which are small businesses owned by minorities.
This year, more than 1,000 SDB roofing companies are poised to take advantage of this resource, and there is room for many more to do so. Even roofing companies that do not qualify as small businesses may benefit from these awards—numerous contract opportunities are available for large firms that enter into joint ventures with small firms or volunteer to act as mentors to such companies.
The federal government, under the Small Business Act, is determined to promote the growth of small and/or disadvantaged businesses by setting goals for awarding federal contracts. Presently, the government seeks to meet the following goals in awarding federal contracts: 23 percent of prime contracts to small businesses; 5 percent of prime contracts and subcontracts to women-owned small businesses; 5 percent of prime contracts and subcontracts to SDBs; 3 percent of prime contracts and subcontracts to service-disabled, veteran-owned small businesses; and 3 percent of prime contracts to HUBZone businesses (those in historically underused business zones).
What is a small business?
The Small Business Act defines a small business as one that is organized for profit with a place of business in the U.S. and operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of U.S. products, materials or labor. A small business cannot dominate its field on a national basis and must meet the numerical small-business size standard for its industry.
The Small Business Administration (SBA) establishes size standards based on average annual receipts or number of employees. Roofing companies and most other specialty contracting companies are considered small if their average annual receipts do not exceed $13 million.
This size calculation includes receipts of all affiliated businesses the small business has power to control, whether exercised or not, as indicated by factors such as common ownership, common management and identity of interest (family members, for example). Power to control exists when a party or parties have 50 percent or more ownership. It also may exist with considerably less than 50 percent ownership by contractual arrangement or when one or more parties own a large share compared with other parties.
SBA administers two primary business assistance programs for SDBs—the Small Disadvantaged Business Certification Program and 8(a) Business Development Program. The principal difference between these two overlapping programs is that the 8(a) Business Development Program focuses on business development and training and the Small Disadvantaged Business Certification Program pertains to benefits in securing contracts. 8(a)-certified firms automatically qualify for SDB certification, but not all SDB-certified firms qualify for 8(a) program assistance.
Under the Small Disadvantaged Business Certification Program, certified SDBs are eligible for special bidding benefits intended to overcome the effects of discrimination. Certified firms are placed in an online registry—the Central Contractor Registry—for three years, which can be searched by contracting officers and prime contractors seeking potential suppliers. The registry can be accessed at www.ccr.gov and is searchable by name, industry group, city and type of SBA certification. Because the purpose is to overcome discrimination, the businesses that qualify for the program are required to meet social, economic, ownership and control criteria.
Who qualifies?
An SDB is at least 51 percent owned by one or more socially and economically disadvantaged individuals and has its management and daily business controlled by one or more such individuals. This can include a publicly owned business that has at least 51 percent of its stock unconditionally owned by one or more socially and economically disadvantaged individuals.
African Americans, Hispanic Americans, Asian Pacific Americans, subcontinent Asian Americans and Native Americans are presumed to qualify. Others can qualify if they show by a preponderance of evidence that they are disadvantaged. Economic disadvantage is shown by demonstrating the socially disadvantaged owners each have a net worth of less than $750,000, excluding the equity of the business and their primary residence.
Although women and veterans are not presumptively disadvantaged for purposes of this certification, SBA administers other programs to assist such groups. These programs include the Veterans Business Outreach Program, which provides entrepreneurial development services, such as training, counseling and mentoring, to veterans who own or are considering starting a small business, and Women's Network for Entrepreneurial Training, which helps female entrepreneurs find mentors and provides numerous workshops and services. (For an explanation of the mentor-protégé relationship, see "Ways to work together," page 48.)
Nondisadvantaged individuals may be involved in the ownership and management of an applicant firm as stockholders, members, partners, directors and/or officers. However, no nondisadvantaged individual or immediate family member may exercise actual control or have the power to control the firm; be a former employer or principal of a former employer of any disadvantaged owner of the applicant firm; or receive compensation from the applicant in any form as a director, officer or employee, including dividends that exceed the compensation to be received by the highest officer. If one or more of these situations exist, the nondisadvantaged individual is considered in control of the firm.
What are the benefits?
The two special bidding benefits conferred on certified SDBs are price evaluation adjustments and evaluation factors.
A price evaluation adjustment is made by adding up to 10 percent to the price of bids or offers received from non-SDB contractors. The program also allows credits of up to 10 percent for prime contractors who achieve or exceed SDB subcontracting targets. An SDB roofing contractor winning a contract as a result of a price evaluation adjustment is subject to a "limitation in subcontracting" rule, requiring that contractor to perform no less than 25 percent of the work. This requirement is reduced to 15 percent for general contractors. However, the price evaluation adjustment does not apply to some procurements, including those less than $100,000, those "set aside" for small businesses and those under the 8(a) program.
In addition to the price evaluation adjustment, qualified prime contractors can receive a credit when using SDBs as subcontractors. The "evaluation factor" for SDB participation allows offerors to submit targets for SDB participation expressed as dollars and percentages of the total contract value. A contracting officer awards the most points to the offeror with the most dollars targeted to SDBs or considers it one of several elements. In the construction arena, this program only applies to competitive, negotiated acquisitions in excess of $1 million. SDBs bidding as prime contractors may elect this benefit instead of the price evaluation adjustment but may not receive both. As with the price evaluation adjustment, the evaluation factor cannot be used in some procurements, including those made via sealed bidding, 8(a) program acquisitions and small-business set-asides.
8(a) program
During fiscal year 2004, about 8,900 businesses participated in the 8(a) Business Development Program, generating $5.6 billion in revenue. Such participation is common in the construction industry, and 500 of the nearly 3,000 8(a)-certified construction companies are roofing companies.
The 8(a) program is similar in some respects to the Small Disadvantaged Business Certification Program. For example, to qualify for the 8(a) Business Development Program, a small roofing contracting company must be owned and controlled by a socially and economically disadvantaged individual.
To meet the economic disadvantage test for the 8(a) Business Development Program, all individuals with controlling interest in the business must have a net worth of less than $250,000, excluding the value of the business and their personal residences. The 8(a) Business Development Program focuses on business development and is characterized by a relationship with SBA that provides business advice and coaching.
The 8(a) Business Development Program promotes business development during a nine-year period. The first four years are a developmental stage designed to help overcome economic disadvantage by providing business development assistance. The remaining five years are a transitional stage designed to prepare participants for self-sufficiency upon leaving the program. Each participant's progress is monitored and measured, and developmental needs are identified annually. In addition, SBA provides specialized training, professional consultant assistance and high-level executive development.
To qualify for the 8(a) Business Development Program, applicants must meet size standards, have been in business for at least two years, and display reasonable success potential and good character. Although the two-year requirement may be waived, firms must continue to comply with various requirements while in the program. Potential for success is evaluated by considering the experience of a firm's managers; operating history; ability to access credit and capital; financial capacity; performance record; and whether the firm or its employees hold the requisite licenses required by the industry.
Regulations permit 8(a)-certified companies to form beneficial partnerships with other 8(a)-certified and non-8(a)-certified companies for the purpose of performing a specific 8(a) contract. These agreements, which must be approved by SBA, are permissible when an 8(a)-certified company lacks the necessary capacity to perform the contract on its own and the agreement is fair and will be of substantial benefit to the primary 8(a)-certified company.
An 8(a)-certified participant in such an agreement is required to perform a minimum percentage of the contract work. Roofing contractors are required to perform at least 25 percent of contract work, not including the cost of materials, using their employees. General contractors and heavy construction contractors are required to perform at least 15 percent of the work. In addition, every joint-venture agreement to perform an 8(a) contract must designate the primary 8(a)-certified participant as the managing venturer and an employee of the managing venturer as the project manager. Moreover, not less than 51 percent of the net profits earned by the joint venture must be distributed to the primary 8(a)-certified participant.
Joint ventures typically are classified as affiliates for size calculation purposes. So when two businesses wish to team up to bid on a government contract, they must be careful to ensure doing so does not affect small-business status. If each business is below the standard individually but not when combined, the joint venture generally will not be considered a small business. Instead, they are considered affiliated for the purpose of that contract.
HUBZones
Another way to benefit from the federal government's interest in small-business growth is through the HUBZone Empowerment Contracting Program. The program is intended to promote economic development and encourage economic growth in urban and rural communities by providing small businesses access to federal contracting opportunities through the establishment of a system of preferences.
As of Oct. 1, 2000, all federal agencies are subject to the requirements of the HUBZone program. In fiscal year 2004, more than $4.7 billion in contracts were awarded to HUBZone businesses. Small businesses participating in the 8(a) program that already are in or relocate to a HUBZone are eligible to receive 8(a) and HUBZone contracting opportunities. Currently, more than 500 roofing contractors are HUBZone-certified and more than 250 of them also are 8(a)-certified.
To qualify for the HUBZone program, a small business must meet the following criteria: the principal office must be located in a HUBZone; it must be 51 percent owned and controlled by U.S. citizens; and at least 35 percent of its employees must reside in a HUBZone. For the HUBZone evaluation, the "principal office" is the location where the greatest number of employees perform work. Therefore, even if a company has its headquarters and multiple offices in non-HUBZone areas, the entire business still may claim HUBZone status if its principal office is in a HUBZone area. Employees who perform work at job sites are not included in the count.
There are three categories of HUBZones. The most prevalent are Qualified Census Tracts, which are designated by the U.S. Department of Housing and Urban Development in a notice published periodically in the Federal Register. The most recent notice, based on the results of the 2000 census, included more than 11,000 Qualified Census Tracts.
In addition, there are more than 1,000 Qualified Nonmetropolitan Counties. These counties have median household incomes of less than 80 percent of the state median household income or unemployment rates of at least 140 percent of the statewide average.
The third category includes lands within the boundaries of federally recognized Native American reservations. Businesses on reservations are not required to be owned by Native Americans.
Take advantage
The federal government promotes the success of SDBs by dedicating billions of dollars to their growth and development through the various programs described. Many roofing contractors who may be entitled to benefit from these programs are not doing so simply because they are unaware of the programs and benefits they provide.
If you meet the qualifications discussed, contact your local SBA office—there is at least one in every state—for additional information.
David M. Gersh is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
Ways to work together
The Small Business Administration's (SBA's) Mentor-Protégé Program is designed to enhance the capability of 8(a)-certified companies to improve their abilities to compete for and receive federal contracts by matching them with mentors. Mentors provide technical and contract management assistance, financial aid in the form of equity investments and/or loans, subcontract support and capabilities through joint-venture arrangements that assist an 8(a)-certified company to perform projects for which it otherwise would not qualify.
SBA will not classify mentors and protégés as affiliated for the purposes of size determination based on the mentor-protégé agreement or any assistance provided pursuant to the agreement. Further, a joint venture will be deemed small provided the protégé qualifies as small under the applicable size standard. To raise capital for a protégé, a mentor is permitted to invest an equity interest of up to 40 percent in the protégé firm.
A mentor can be an 8(a)-certified company in the transitional stage, a firm that has graduated from the program or any other business. To qualify as a protégé, a company must be in the 8(a) program developmental stage and in good standing or never have received an 8(a) contract or be less than half the size standard corresponding to its primary size code.
A mentor-protégé agreement must be in writing. SBA must approve such agreements, and approval may be withheld if SBA finds the assistance provided is insufficient to promote any developmental gains to the protégé or the agreement is seen as a mere mechanism for non-8(a)-certified companies to participate in 8(a) contract opportunities.
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