14 Sep 2020

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 1^st, 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.