WhyAre Small Federal VARs Up In Arms?

Small-BusinessCutoff Lowered

In anutshell, the Footnote 18 exception of the North American IndustryClassification System (NAICS) Code 541419 sets the definition of a small VAR as150 employees or fewer. If the footnote is removed, as the Small BusinessAdministration (SBA) is proposing, a small VAR could only be defined as having$27.5 million in revenue or less, the alternative option also allowed in theexception. The SBA told CRN that the rule change would help simplify andprovide consistencies in the federal contracting process.

WhyAre VARs Upset?

Smallfederal VARs say that removing the footnote exception setting a small businessas 150 employees or less would lose them millions, and some are saying it willput them out of business. The reason, they told CRN, is that losing theirsmall-business classification would mean they would be competing head-to-headfor federal contracts with industry giants such as CDW, Hewlett-Packard andIBM. Some VARs pointed out that big business also could lose, as they oftenpartner with smaller VARs to gain contract wins.

ThisIsn't The First Time

Thisisn't the first time that the exception has been under fire. In 2002, when theemployee cutoff was 100 for IT VARs, the SBA proposed changing the sizestandard to 500 employees. That change was shot down in December 2003 and acompromise size standard of 150 employees was put in place under NAICS Code541519. The revenue size standard has also been on the rise, starting at $19million, rising to $25 million in 2011 and finally $27.5 million in June ofthis year.

Why IsThis Rule Here In The First Place?

"SBA'ssize standards and program eligibility requirements do not specifically addressthe classification of federal contracts that combine services with theacquisition of supplies. As a result, federal agencies have had difficultyusing small business preference programs for these types of contracts,especially for IT," the SBA said in 2002.

ShowMe The Numbers

Thepossible removal of the exception is based on the most recent 2007 census data,which SBA representatives said showed that the exception was no longernecessary as most of the companies between 45 and 150 employees would stillqualify as a small business under the new revenue cutoff. However, VARs saidthat they think it will have drastic effects on federal contracts. LloydChapman, president of the American Small Business League, estimates that thetypical federal reseller makes between $2 million and $3 million in revenue peremployee, instead of the $140,000 in revenue the rule change would suggest.

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