Do you have all your eggs in one basket? Economic Dependence is a significant obstacle to the eligibility of many applicants desiring to gain 8(a) Certification for their business. In fact, it is currently the #1 issue for which we have to turn the greatest number of potential 8(a) applicants away, until the issue is resolved.
First, a little history on the Economic Dependence issue, or the 70% rule as we often refer to it. Per the Faison Office Products Office of Hearings and Appeals case in 2007, an applicant can be found to be dependent upon a single non-government entity if that entity constitutes 70% or more of the total revenues.
Businesses frequently start with a single client. The application of this rule, and the time frame for calculating this percentage, makes this an issue that must be examined closely.
If you would like to know if you have economic dependency, please take our questionnaire below:
You are also welcome to review the requirements below.
Here are facts on how to determine if you have economic dependency:
- If you have earned more than 70% of your revenue from one (1) commercial client over the last three (3) years and still have them as a client, economic dependency may be found by the SBA.
(a) If this is the case for your business, and you have fractured or terminated your relationship with this client, and can show you are no longer dependent on that client anymore you may be able to get 8(a) Certified. How? You must be able to show the SBA that the relationship has ended and that your current mix of clients does not result in 70% economic dependency with any one of your current active clients.
(b) If this is the case for your business, and this is not your sole client, you must be able to show that your contractual relations do not restrict your business from selling the same type of products or services to another purchaser you may be able to get 8(a) Certified.
- If you have earned more than 70% of your revenue from a direct Federal Government Agency, as the prime contractor, over the last three (3) years economic dependency will not be found by the SBA.
- If your business has not been in operation for three (3) full years, the SBA will look at the totality of the revenues earned from inception to see if 70% economic dependency exists. The same rule applies here too as indicated above.
- If no past 70% economic dependency existed, the SBA may also look at your current mix of clients to see if one (1) of your current clients is causing economic dependency. This is typically done by looking at your last twelve (12) months of contract mix. If the contractual relationships do not restrict your business from selling the same type of products or services to another purchaser you will not be found to be economically dependent.
- Finally, if no past 70% economic dependency existed but your business only has one (1) commercial client at the time of 8(a) Application submission economic dependency will be found by the SBA.
In the 8(a) Application portal (certify.sba.gov), the SBA only requests for you to provide the last twelve (12) months of revenue breakdown by client. This may make you think they only look at the last twelve (12) months however the SBA can ask for any information they deem necessary to determine your overall 8(a) eligibility.
Don’t be surprised if the SBA analyst comes back and requests a breakdown over the last three (3) years and through the current year to date. To be 100% sure you won’t be found to be economically dependent, you should ensure that none of the above exists before you apply for the 8(a) Program.
Additionally, the risks are greater than merely a denial of your 8(a) Application. If a business is found to be economically dependent upon another entity, and a resulting size determination concludes that they are other than small, that would exclude the business from being recognized as a small business for the purposes of contract awards.