Most contractors beginning their federal contracting journey eventually face the same fundamental question: What is the size of my business? In federal procurement, business size determines eligibility for specific solicitations, participation in small business programs, and access to set-aside opportunities.
What “Size” Means in Federal Contracting
When talking about calculating size, the first thing to ask is, what does size even mean? While this may seem like a fairly simple question, it can have varying answers based on who you are asking, and why you are asking it. In the realm of federal contracting, “size” is a regulatory classification defined by the Small Business Administration (SBA). A business is considered small only if it does not exceed the size standard assigned to the North American Industry Classification System (NAICS) code for a solicitation or its primary industry.
When an agency evaluates your business size, the benchmark is not how you compare to competitors in your city or state, but whether you fall under the SBA’s established threshold for the relevant NAICS code.
What is a NAICS code?
Given the last answer, next question may be, “what is a NAICS code?”
Each NAICS code is a six-digit number that directly correlates to a defined industry, and size standard. Contractors must select a primary NAICS code to represent what their company does when registering their business on SAM.gov and participate in different federal contracting programs. The assigned code dictates whether the size standard is based on employees or receipts.
Calculating Business Size?
There are two types of size standards, a receipts-based size standard, and an employee-based size standard. The regulations and table of size standards will list these out for each NAICS code, so when faced with a size question, you can reference those to see exactly which standard and size applies to the NAICS code at issue.
**
Calculating Size under an Employee-Based Standard**
For employee-based standards, the SBA requires businesses to calculate their average number of employees based on each pay period during the preceding 24 completed calendar months, a standard implemented across all industries as of December 2022 (13 CFR § 121.106).
-
Both full-time and part-time staff are counted equally.
-
Employees of domestic and foreign affiliates must be included.
-
If a company has been operating for fewer than 24 months, the calculation is based on the available pay periods.
Calculating Size under a Receipts-Based Standard
Other NAICS codes apply a receipts-based standard. SBA defines “receipts” as all revenue in any form, including sales of products and services, interest, dividends, rents, royalties, fees, or commissions—minus returns and allowances. Exclusions are limited, and costs such as subcontractor expenses or payroll taxes cannot be deducted.
The calculation requires averaging annual receipts over the past five completed fiscal years. For younger businesses with fewer than five years of operations, receipts are annualized based on the period available.
Why Accurate Size Calculation Matters
Correctly determining and maintaining size status has broad implications:
-
SAM.gov Registration: Businesses must accurately represent their size and primary NAICS code when registering. Federal agencies rely on this information when evaluating eligibility.
-
Program Participation: Many SBA programs, including 8(a), HUBZone, and WOSB, require participants to meet small business size standards.
-
Contracting Opportunities: Misrepresentation of size can result in losing eligibility for set-asides, facing size protests, or potential penalties.
Summary
Business size in federal contracting is a precise SBA classification, not an informal comparison. Correctly identifying your NAICS code and calculating size ensures compliance, protects against challenges, and opens the door to valuable contracting opportunities.
**
Sources:**