SmallIT VARs bet big when they apply for major federal contracts, but that could bein jeopardy if the cutoff for small VARs is changed.

Theproposed rule change by the Small Business Administration (SBA) would remove afootnote exception in NAICS Code 541519, which defines a small IT VAR as 150employees or fewer. Right now, VARs can choose between a cutoff of 150employees and a cap of $27.5 million in revenue. If the exception were removed,small VARs would only be defined as those with up to $27.5 million in revenue.

WhileVARs won't be stripped of current contracts, it could have major implicationsfor both those contracts and ones they would want to bid on down the road, saidJim Fontana, partner at Dempsey Fontana, a Reston, Va.-based law firm thatspecializes in federal contract law for VARs.

[Related:FederalVARs Fighting Back]

"Thiswill certainly jeopardize their business, not just the business in the futurebut contracts that they currently have that they won't be able to renew,"Fontana said.

Theeffect on new contracts will hit small IT VARs especially hard, Fontana said,because they rely on a high volume of shorter-term IT contracts to survive,whereas a services-focused company might get multiple-year contracts. Thatmeans that they won't be able to rely for long on a backlog of awardedcontracts, Fontana said.

"Itwould be more devastating here because these are short-term product deliverycontracts. They're not longer-term service delivery contracts," Fontanasaid.

CarlyGoldstein, vice president at Santa Fe, New Mexico-based WildflowerInternational, said that in order to get major federal contracts, IT VARs haveto spend years on development, execution and planning. Goldstein said it takesa lot of time to build up a record of past performance, staff, facilities,financial credibility and stability to win these contracts.

"It'sa lot of the contracts we have. A lot of the contracts we have are under thisparticular NAICS code. It's a primary one in our representations andcertifications. That's what kind of business we are," Goldstein said."We're not unique. There are a lot of companies like ours."

Inparticular, Goldstein worried about the implications of re-representations,where a contract can be protested based on a government option or at any timeby the federal government. In a re-representation, a company would have topresent, among other factors, its updated size status, a status that could bechanged if the footnote were removed. Goldstein said that would be a way thatcurrent contracts could be in jeopardy.

Onesuch contract is the NASA Solutions for Enterprise Wise Procurement (SEWP) V,which accounts for $1 billion in federal contracts, VARs said. If the SBAsucceeds in its push to remove the exception, VARs said that contract andothers could be in question.

"Thatwould be the perfect example of a problem that is going to come up if thisfootnote is removed," said Augie Riolo, president of Virginia Beach,Va.-based Knowledge Information Systems.

Goldstein,meanwhile, said that Wildflower already has started hiring to account forcontracts it expects to win in coming months, including administrative, sales,technical and project management employees. Wildflower also already has startedhiring for the SEWP V contract, estimating that it would add up to 10 to 20employees for that contract alone.

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