SBA Rejects Major Changes in Size Standard Methodology

The SBA has rejected several recommendations for major changes in how the SBA calculates small business size status.

In commentary published in the Federal Register last week, the SBA rejected (among other things) recommendations that it use average employee count to evaluate the sizes of construction firms and that other firms’ sizes be measured by profits or net worth instead of average annual receipts.

The SBA’s commentary accompanied the publication of the SBA’s revised Size Standards Methodology White Paper, which is now available on the SBA’s website.  The White Paper explains how the SBA establishes, reviews, and modifies its small business size standards.

Way back in October 2009, the SBA solicited commentary on the White Paper in effect at the time.  The SBA also sought comments on various policy questions the SBA must consider when developing size standards, such  as “how high a small business size standard should be, should there be a single measure of business size for all industries (i.e., employee or annual receipts)” and so on.  The SBA accepted comments until the end of the 2015 fiscal year.

Now, some 8 1/2 years after the SBA first sought public comments, the SBA has published its responses to those comments.  If you’re something of a size policy nerd (I’ll admit to it!), the SBA’s Federal Register commentary is worth reading in its entirety.  But for those who may not put themselves in that category, here are some of the highlights:

  • Profit measure rejected.  The SBA rejected a suggestion to establish size standards based on gross profits rather than average annual receipts or employee count.  “If a size standard were established in terms of gross profits,” the SBA wrote, “a company with hundreds of millions in revenues and thousands of employees can qualify as small under a profits-based size standard.”  In fact, the SBA said, “[i]t is not unusual for very larger companies to have little or negative profit over the course of business cycles.”  Plus, “a firm’s profits can be manipulated and thus would be an inconsistent and misleading measure of [a] firm’s size for size standards purposes.”  Probably once a month or so, I hear from a business owner who asks whether size standards are already based on profits.  It’s a rather common misconception.  But not only are profits not the measure of small business size, the SBA has no plans to head in that direction.
  • Employee count for construction rejected.  The SBA also rejected a suggestion to use average employee count, rather than average annual receipts, to measure the sizes of construction companies.  “Under SBA’s prime contractor performance requirements . . . a general construction company needs to perform as little as 15 percent of the value of the work and a specialty trade contractor can perform as little as 25 percent of the work with their own resources,” the SBA wrote.  “SBA is concerned that employee based size standards could encourage construction companies near the size standard to subcontract more work to others to bypass the limitations on subcontracting and remain technically a small business.”  The SBA concluded: “[r]eceipts, as a representative of the overall value of a company’s entire portfolio of work in a given period of time, are a better measure of the size of a construction company to determine its eligibility for Federal assistance.”
  • Net worth limits rejected.  The SBA similarly rejected a proposal to base size standards on net worth, saying that such a measure “is not practicable.”  The SBA explained that “[a] company’s net worth can be affected by a number of things, such as debt, repurchased corporate stock, etc.”  Furthermore, “data on net worth is not available by industry,” which would make it impossible for SBA to fairly establish size standards based on that measure.
  • No mid-tier or “micro” size standards.  The SBA also rejected calls to establish new size standards for “mid-sized” businesses (certain companies that have outgrown the small business size standard) and “micro” businesses (such as those with less than $100,000 in sales or fewer than 20 employees).  In rejecting these proposals, the SBA cited “significant complexity,” a “much more burdensome system and reporting requirements” and the fact that “Congress would need to establish new small business procurement goals for each tier to ensure that small businesses at different tiers have a fair access to Federal contracts.”

The SBA’s commentary is chock-full of interesting information, and not everything is the SBA saying “no.”  The SBA does make some proposed improvements and refinements to its size standards methodology.  The SBA also seeks public commentary on a variety of important size questions, such as whether there would be a uniform maximum size standard, and whether the SBA should consider lowering any size standards.  Public comments are due by June 26, 2018.