Firms oppose proposed small-biz rules

SBA urged to increase employee limits

Bill Colligan, CSSI president and chief operating officer, must prepare his company to graduate from small-business status a year early. Changing the rules "affects the livelihoods of 200 people," he said.

Olivier Douliery

Companies of 200 to 300 people "that are just starting to get enough infrastructure to bid and win larger contracts ? could win one or two big subcontracts and be out of the ballpark already." ? Valerie Perlowitz, president and CEO of Reliable Integration Services Inc.

Olivier Douliery

For the last eight years, Bill Colligan has carefully managed the growth of CSSI Inc. to ensure that the Washington company would retain its status as a small-business contractor until it was ready to compete with larger firms. This meant holding CSSI's annual revenue under its small-business revenue cap of $21 million, even while the number of employees grew to 210.

But under new proposed rules for defining small businesses, the engineering and technical services firm would lose its eligibility. Under these rules, CSSI could have no more than 150 employees to compete for small-business set asides in the "other computer-related services" category, or 200 or fewer employees to compete for small-business set asides in the "engineering services" category.

Now, Colligan, president and chief operating officer, is trying to prepare CSSI for graduation a year early. Changing the rules "affects the livelihoods of 200 people," he said.

Many small businesses face a similar situation, IT company executives said.

Companies of 200 to 300 people "that are just starting to get enough infrastructure to bid and win larger contracts ... could win one or two big subcontracts and be out of the ballpark already," said Valerie Perlowitz, president and chief executive officer of Reliable Integration Services Inc. in Vienna, Va.

Perlowitz said she expects her company would have one or two more years, instead of five or six, as a small business under the new rules.

Had Colligan known the rules might change, he would have planned CSSI's growth differently.

"We probably would have subcontracted out more work," Colligan said. "We might have the same revenue or even more revenue, but we'd have a smaller number of employees."

The Small Business Administration proposed the new rules in the Federal Register March 19 to simplify the small-business size standards. SBA officials are reviewing comments from industry regarding the proposed changes, but have set no timetable for deciding whether to adopt the rules.

Companies that meet the small-business size standard in their industries can qualify for small-business set-aside contracts as well as SBA loan programs and other federal business-development programs.

The proposed rules would cut the number of size standards from 37 to 10. All standards would be based on number of employees.

Currently, some are based on annual revenue, and others are based on employee count. The basis for new standards would range between 50 employees and 1,500 employees, depending on the industry or SBA program.

Some industries, including IT, also would get an annual revenue cap. The SBA added the revenue caps to industries in which companies could skirt the employee cap by subcontracting out a lot of work, said Gary Jackson, SBA assistant administrator for size standards. Subcontractors are not counted as employees of the prime contractor.

About 1,100 companies would gain or lose small-business eligibility under the new rules, Jackson said.

"We think we've done a pretty good job trying to minimize the impact on small businesses. It will be an easier system for the public to understand and to work with," he said.

But many IT executives said the rule change would have a far greater impact on their industry than SBA officials realize. Although they support simplifying the rules, the IT executives worry that too many companies will lose their small-business status before they have time to prepare for competition with contracting giants such as Lockheed Martin Corp., Northrop Grumman Corp. and General Dynamics Corp., which all earn billions in federal government contracting each year.

[IMGCAP(2)]Under the proposed rules, the revenue cap for IT companies is $30 million. To be considered small, companies could have no more than 150 employees and earn no more than $30 million in revenue annually.

Perlowitz and others said the SBA needs to increase the employee cap to more than 150 so that IT companies would not be pushed into competition with much larger businesses before they hit the $30 million cap.

Under the proposed rules, a company with $10 million to $12 million in annual revenue that wins a contract requiring 50 to 100 people could quickly surpass the employee-count limit, said Perlowitz, who serves as small business subcommittee chairwoman for the Arlington, Va.-based Information Technology Association of America.

"A company could only win one or two major contracts before it is disqualified as a small business," she said.

Small-business executives aren't the only ones saying the IT size standard is too low. Executives at large systems integrations said the low size standard would hurt their businesses by cutting their pool of subcontractors.

"Our long-term relationships with small businesses would be affected," said Dawn Patillo, small business liaison officer for the U.S. Government Solutions unit of EDS Corp. of Plano, Texas. "Once a small business crossed the threshold from small business to large, we'd have to move on and use a new supplier on new contracts."

If the new size standards pushed a company into the large-business category, the rules say that work won as a small business would still belong to that company. But on new contracts, EDS would have to assess whether picking a supplier with 145 employees would push the company into the large-business category, Patillo said.

Murray Schooner, director of the Supplier Diversity Program at Unisys Corp. of Blue Bell, Pa., said his firm would immediately lose some small-business subcontractors under the proposed rules.

"We'd have to decide whether we are going to [continue to] work with them," Schooner said, adding that Unisys would not drop a vital supplier just because it exceeds the small-business threshold.

"Business is about getting the job done well and satisfying the customer," he said. "Our small business utilization might go down "if it's more important to keep a good contractor than find another small one.

"There will probably be a period where there is agony on both sides. After a while things will clear up," Schooner said.

Comments on the proposed rule are due by May 18 to restructure.sizestandards @sba.gov or at www.regulations.gov.

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.

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