It probably doesn’t need to be said that all of us have been chafing under inflation lately, and federal contractors are certainly no exception. Rises in costs for goods and labor have exerted serious pressure on businesses and households worldwide. However, not all inflation is bad. SBA recently released a final rule taking into account the inflation of the past few years when it comes to the various receipts-based size-standards and economic disadvantage limits, as well as finally adjusting the 8(a) Business Development Program sole source limits. These changes are crucially important for those businesses that have just barely exceeded the applicable size standards, or that were getting close to the maximum. In this post, we’re going to explore this rule.
It is worth noting that this adjustment is somewhat unusual as the agency had just completed an adjustment in 2019. As SBA notes, it “is required to assess the impact of inflation on its monetary-based size standards at least once every five years,” so the next planned adjustment was supposed to be 2024. But the key phrase there is “at least.” SBA can certainly make adjustments before another five years passed.
The last few years have had a major impact on businesses, to say the least. With the COVID-19 pandemic, supply-chain issues, and related economic effects, SBA decided that further adjustments were needed in light of the unusual inflation that has been experienced. First, the agency calculated the inflation that has occurred since the last adjustment (which was based on 4th quarter 2018 prices):
The GDP price index for the base period (i.e., 4th quarter of 2018) was 111.191 and, according to the BEA GDP advance estimate released on July 28, 2022 (the latest available when this rule was prepared), the GDP price index for the end period (i.e., 2nd quarter of 2022) was 126.367. Accordingly, inflation increased 13.65 percent from the fourth quarter of 2018 to the first quarter of 2022 (((126.367 ÷ 111.191) – 1) x 100 percent = 13.65 percent).
The agency then took this 13.65 percent figure and adjusted the size standards up by multiplying the size standards by 1.1365, and then rounding the result to the nearest $500,000 (nearest $250,000 for agricultural industries). This resulted in some pretty hefty increases. Here are a few example changes:
- NAICS 236220, Commercial and Industrial Building Construction, had an old size standard of $39.5 million. $39.5 million times 1.1365 equals $44.89 million, which rounds up to $45 million. Therefore, $45 million is the new size standard for NAICS 236220.
- NAICS 541511, Custom Computer Programming Services, had an old size standard of $30 million. $30 million times 1.1365 equals $34.09 million, which rounds down to $34 million. Therefore, $34 million is the new size standard for NAICS 541511.
- NAICS 561730, Landscaping Services, had an old size standard of $8.5 million. $8.5 million times 1.1365 equals $9.66 million, which rounds down to $9.5 million (remember, it’s to the nearest $500,000 for non-agricultural industries and nearest $250,000 for agricultural industries.) Therefore, $9.5 million is the new size standard for NAICS 561730.
The size standard change is good news for businesses getting near the size standards. But that’s not the only change the rule made. The SBA also looked at the standards for what makes an individual “economically disadvantaged” in the 8(a) Business Development Program as well as the Economically-Disadvantaged Women-Owned Small Business (EDWOSB) Program. 13 C.F.R. 124.104 requires that individuals claiming “economically disadvantaged status” for the 8(a) program have a net worth under $750,000, an aggregate gross income (averaged over the past three years) under $350,000, and less than $6 million in total assets. Those standards are the same for the EDWOSB Program under 13 C.F.R. 127.203. These figures were implemented in May 2020.
Because the figures were established in 2020, the inflation calculation used to adjust the standards is not the same as it was for size standards. Since the second quarter of 2020, inflation has increased by 11.86 percent. Therefore, that is the figure that SBA used to adjust these economic disadvantage limits. Multiplying each limit by 1.1186, we get figures of $838,942 for net worth, $391,506 for aggregate gross income, and $6,711,534 for total assets. SBA then rounded these figures, so now, with this new rule, the net worth limit for economically disadvantaged individuals is $850,000, the aggregate gross income limit is $400,000, and the total asset limit is $6.5 million. For those companies that were just over the standards, this is welcome news.
8(a) Sole Source
While reviewing the various figures, SBA realized something. 8(a) Program participants, excluding those owned by Native American/Alaskan/Hawaiian tribes, may not receive 8(a) sole source contracts where they have received a combined total of competitive and sole source 8(a) contracts in excess of $100,000,000 during their participation in the program. But this figure of $100,000,000 was set all the way back in 1998. Since then, no adjustments have been made to that figure! Applying the same GDP price index formula, it used for size standards and economic disadvantage limits, SBA found inflation has increased by 68.33 percent since 1998. Accordingly, SBA increased the 8(a) sole source limit by that amount, rounded to $168,500,000.
The rule does also address the issue of exactly when these changes would come into effect. SBA notes: “Typically, as is the case with the July 2019 IFR, SBA’s changes to size standards become effective 30 days after publication of the corresponding final or interim final rule.” Indeed, the page says that the rule will become effective December 19, 2022. SBA also addresses how this works in the context of ongoing procurements: “(I)n accordance with 48 CFR 19.102(c), it is the contracting officer’s decision whether to amend a solicitation to incorporate the new size standards if SBA amends the size standard and it becomes effective before the due date for receipt of initial offers.” So, carefully check your solicitations to see what size standards apply if your offers are due after December 19, 2022. If they are due before then, you will use the old 2019-adjusted size standards.
This is good news in general for small business federal contractors across the board. It is particularly good news for those in the 8(a) program: Not only are the size standards increased, but it is easier to qualify for economically disadvantaged status and the sole source limit has finally been raised. This was a needed move by SBA considering the recent high levels of inflation and, for the 8(a) sole source limit, a needed adjustment for a figure set almost 25 years ago.
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