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SBA’s 8(a) 70% Rule

Many small businesses working as subcontractors for federal contractors see the large benefit of having the 8(a) Certification but are unable to currently apply due to the dreaded 70% rule.  Many of these firms have large opportunities in hand if they could obtain the 8(a) Certification.  Therefore this week I am going to go over the 70% Rule to provide a greater understanding.

What is the 70% Rule?
To qualify for 8(a), not more than 70% of the firm’s billing can come from a single client.  The most common methodology the SBA uses to evaluate the firm’s billing is on a rolling 12-month basis.  I have created some examples below.

Example A:

8(a) Application Date November 1, 2020

Month

Year

Customer

Billing

Percentage

November

2019

ABC

XYZ

$5,000

$5,000

 

December

2019

ABC

$10,000

 

January

2020

ABC

$10,000

 

February

2020

ABC

XYZ

$2,500

$7,500

 

March

2020

ABC

$10,000

 

April

2020

XYZ

$10,000

 

May

2020

ABC

$10,000

 

June

2020

ABC

XYZ

$7,500

$2,500

 

July

2020

ABC

$10,000

 

August

2020

ABC

XYZ

$5,000

$5,000

 

September

2020

ABC

$10,000

 

October

2020

XYZ

$10,000

 

Total

 

 

$120,000

 

Total on a Rolling-12 Month Basis

 

ABC

XYZ

$80,000

$40,000

66.67%

33.33%

 

This firm is Eligible because its largest customer, ABC, represents only 66.67% of the firm’s billing on a 12 months basis. 

Now let’s take a look at what happens if we wait until December 1st, 2020 to apply.  During that month and all of the firm’s billing comes from ABC.  

Example B:

8(a) Application Date December 1, 2020

Month

Year

Customer

Billing

Percentage

December

2019

ABC

$10,000

 

January

2020

ABC

$10,000

 

February

2020

ABC

XYZ

$2,500

$7,500

 

March

2020

ABC

$10,000

 

April

2020

XYZ

$10,000

 

May

2020

ABC

$10,000

 

June

2020

ABC

XYZ

$7,500

$2,500

 

July

2020

ABC

$10,000

 

August

2020

ABC

XYZ

$5,000

$5,000

 

September

2020

ABC

$10,000

 

October

2020

XYZ

$10,000

 

November

2020

ABC

$10,000

 

Total Last 12 months

 

 

$120,000

 

Total on a Rolling-12 Month Basis

 

ABC

XYZ

$85,000

$35,000

70.83%

29.16%

 

This firm is Ineligible because its largest customer, ABC, represents 70.83%, and is over the 70% threshold on a rolling 12 months basis.

Exceptions to the 70% Rule:
1.  If a firm is applying with a two-year waiver and only has one client, the SBA will then waive the 70% requirement, because it is unlikely that a firm this new would have achieved the 70% level of client diversity.

2.  If the firm has only one client, but that client is a direct contract as a prime contractor with the Federal Government then the SBA will waive the 70% rule.