Small VARs Bet Big On Federal Contracts

Small IT VARs bet big when they apply for major federal contracts, but that could be in jeopardy if the cutoff for small VARs is changed.

The proposed rule change by the Small Business Administration (SBA) would remove a footnote exception in NAICS Code 541519, which defines a small IT VAR as 150 employees or fewer. Right now, VARs can choose between a cutoff of 150 employees 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.

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

[Related: Federal VARs Fighting Back]

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

The effect 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. That means that they won't be able to rely for long on a backlog of awarded contracts, Fontana said.

"It would be more devastating here because these are short-term product delivery contracts. They're not longer-term service delivery contracts," Fontana said.

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

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

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

One such contract is the NASA Solutions for Enterprise Wise Procurement (SEWP) V, which accounts for $1 billion in federal contracts, VARs said. If the SBA succeeds in its push to remove the exception, VARs said that contract and others could be in question.

"That would be the perfect example of a problem that is going to come up if this footnote 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 for contracts it expects to win in coming months, including administrative, sales, technical and project management employees. Wildflower also already has started hiring for the SEWP V contract, estimating that it would add up to 10 to 20 employees for that contract alone.

For contracts such as the SEWP V, which was scheduled for a Nov. 1 launch but was delayed due to GAO protests, VARs that could lose their small business standing said they were worried their investment in the contract would be wasted. While the change wouldn't take away contracts that have already be awarded, it would affect renewals or new awards, Fontana said.

Multiple VARs told CRN that they had heard that NASA and other agencies with massive contracts were actively opposing the rule change. NASA and other agencies did not respond to requests for comment from CRN.

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.