The Lifecycle of an SBA 8(a) Company

JOHN URE: Welcome to Cherry Bekaert's GovCon podcast where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors. Today we will discuss small business topics concerning the SBA 8(a) program. I'm John Ure, a tax partner with Cherry Bekaert. With me is Susan Mosier, industry leader for the Government Contractor Services Group at our firm.

JOHN URE: Today we'll examine the lifecycle of an 8(a) company inside the SBA 8(a) program. The program helps small disadvantaged businesses compete for federal work, receive competitive set-asides, and obtain sole-source awards up to $4.5 million for services and goods and $7.5 million for manufacturing. It also offers mentorship through the Mentor-Protégé Program and opportunities for joint ventures.

JOHN URE: Eligibility requires being a small business that is at least 51 percent owned and controlled by U.S. citizens who are socially and economically disadvantaged. Owners must meet financial thresholds: a personal net worth of $7,500,000 or less excluding certain assets, average adjusted gross income (AGI) of $350,000 or less, and less than $6 million in total assets excluding retirement accounts. The SBA monitors progress through annual reviews, business planning, and regular evaluations.

SUSAN MOSIER: The SBA business development program is normally nine years, divided into a Developmental Stage (years one through four) and a Transition Stage (years five through nine). As part of COVID relief, the SBA extended the program by one year for current participants, so some companies effectively have a ten-year term.

SUSAN MOSIER: During the Developmental Stage, companies must focus on the right priorities to be successful and remain compliant. After certification, companies need a well-thought-out plan for growth within the 8(a) program. Early decisions are critical, and many companies are lean with owners wearing multiple roles, so establishing organizational infrastructure and basic systems is essential.

SUSAN MOSIER: One of the first priorities is establishing an acceptable accounting system. Timekeeping and expense reporting should be implemented early. Companies also need to establish an effective and competitive indirect rate structure because government contracting uses unique pricing methods.

SUSAN MOSIER: We assist companies with accounting system setup and developing indirect cost structures, which will evolve as the business matures. Companies must also track 8(a) economic requirements and understand NAICS-based size standards, since every procurement references a NAICS code and size standard to determine small business eligibility.

SUSAN MOSIER: Companies should understand different contract types and how to manage them. With fixed-price contracts, understanding scope is critical to price correctly, and then you must pursue efficiencies during performance to increase profitability. Cost-type contracts require different management to control estimated costs, and time-and-materials contracts present other considerations.

SUSAN MOSIER: The 8(a) program allows sole-source awards where you do not compete. For sole-source awards, the government may require visibility into your cost buildup, so effective pricing and documentation are important even for fixed-price arrangements.

SUSAN MOSIER: During the Developmental Stage, companies should develop skills in costing, proposal writing, federal sales, marketing, and business development. They should identify credentials and certifications that enhance competitiveness, such as ISO, CMMI, or CMMC for DOD work, and consider important investments that position them for bidding.

SUSAN MOSIER: As revenue grows, financial reporting requirements change. Companies with revenue over $2 million will need reviewed financial statements, and those over $10 million will need audited statements. Establishing a bank line of credit before you need it is advisable, which requires organized financial statements and credible projections.

SUSAN MOSIER: Each year the SBA requires an annual report that changes over the program lifecycle. Reporting obligations differ between the Developmental and Transition stages. I'll turn things back to John to discuss key considerations during the Transition Stage.

JOHN URE: The Transition Stage begins in year five. At that point, companies must meet business activity targets to remain eligible for sole-source awards. The program is designed to help firms graduate from sole-source 8(a) awards and compete in the broader government contracting marketplace.

JOHN URE: Business activity targets require increasing non-8(a) revenue over time. In year one at certification, at least 15 percent of total revenue must be non-8(a) revenue, meaning commercial revenue or government contracts not awarded under the 8(a) program. That target increases to 25 percent in year two, 35 percent in year three, 45 percent in year four, and 55 percent in year five. By the Transition Stage, more than half of revenue should be from non-8(a) sources.

SUSAN MOSIER: Companies sometimes miss these targets. Failure to meet the thresholds in an annual report does not automatically result in removal from the program, but companies must be prepared to explain the shortfall and present a plan to increase non-8(a) revenue.

JOHN URE: During the Transition Stage, companies should continue tracking 8(a) economic requirements and size standards to avoid premature removal or to prepare for planned graduation. Acquiring key talent becomes more critical, often involving outside hires and competitive compensation and retirement plans to attract skilled staff.

JOHN URE: Strengthening financial and managerial infrastructure is essential to handle growth. Preparing for cost-type contracts requires more sophisticated compliance measures and tax reporting, particularly if you operate in multiple states or have overseas activities. Failing to address international or multistate issues can be costly and create liabilities.

JOHN URE: As you bid and propose, you should develop mature, competitive rates and learn how to operate in the larger government contracting industry. This includes refining proposal pricing and understanding what makes bids competitive.

SUSAN MOSIER: Beginning in year five, companies should position themselves to remain competitive outside the 8(a) program and ready for more sophisticated regulatory requirements. Small businesses are exempt from certain requirements, such as Cost Accounting Standards and DOD business system rules, but firms preparing to compete for full and open contracts should mature accounting, estimating, purchasing, earned value management (EVMS), and property and materials management systems before graduation.

SUSAN MOSIER: Over the Transition Stage, reduce dependence on 8(a) contracts while pursuing contract vehicles that can sustain the business post-graduation. Timing matters: you are eligible to bid as a small business if you are small when you submit the proposal, even if the award occurs after you graduate. Review your backlog and small-business opportunities to influence timing when possible.

SUSAN MOSIER: Mature your cost structure, proposal pricing, and contract management capabilities to compete for larger opportunities and to manage subcontractor relationships. Consider mentoring other small businesses; transition from protege to mentor in Mentor-Protégé arrangements can create opportunities to retain work as prime or subcontractor.

SUSAN MOSIER: Prepare for larger teaming arrangements and full application of Cost Accounting Standards. Many 8(a) companies have successfully graduated, competed for full-and-open opportunities, and grown by selling to larger primes or private equity. Others have become large, successful firms. However, some companies are not adequately prepared for graduation and struggle once they leave the program.

SUSAN MOSIER: The 8(a) program can help a company grow, but it requires focused planning and consideration of post-graduation strategy. Cherry Bekaert assists companies throughout every stage of the 8(a) lifecycle.

JOHN URE: Thanks, Susan.