DATE: March 19, 2004

SUBJECT: Small Business Administration; Restructuring of Small Business Size Standards

SOURCE: Federal Register, March 19, 2004, Vol. 69, No. 54, page 13129

AGENCIES: Small Business Administration (SBA)

ACTION: Proposed Rule

SYNOPSIS: The SBA is proposing to replace most of the receipts-based small business size standards with size standards based on the number of employees of a business concern. This change would reduce the number of different size standard levels and simplify their application to federal programs. The size standards would range between 50 employees and 1,500 employees depending on the industry or SBA program.

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR). The SBA small business size regulations are in Chapter 1, Small Business Administration; Part 121, Small Business Size Regulations; Subpart A, Size Eligibility Provisions and Standards; Section 121.201, What size standards has SBA identified by North American Industry Classification System codes?

A complete listing of current size standards is available at SBA's Size Standards website at http://www.sba.gov/size/sizetable2002.html, or by calling 202-205-6618 and requesting a copy of the table of size standards.

DATES: Comments on the proposed rule must be received on or before May 18, 2004.

ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW, Mail Code 6530, Washington, DC 20416; by e-mail to restructure.sizestandards@sba.gov; by fax to 202-205-6390; or to http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: SBA's Office of Size Standards, 202-205-6618, or by e-mail to sizestandards@sba.gov.

SUPPLEMENTAL INFORMATION: SBA has 37 different small business size standards for 1,151 industries, 13 sub-industries, and 11 special financial and procurement programs. The size standards started 40 years ago with a considerably smaller number that applied only to SBA's financial assistance programs and to federal procurement. The number of size standards has grown over the years because of the expansion and development of new SBA programs, the increasing size and complexity of the U.S. economy, and demands from small businesses to address unique situations.

SBA's current size standards use two primary measures of business size: number of employees and average annual receipts. Financial assets, electric generation, and refining capacity are used for a few specialized industries. Thirty of the size standards are based on annual receipts, five are based on number of employees, and two are based on other measures.

SBA's size standards have been criticized for how complex it is to determine if a business is small; the fairness of defining a business as small in some industries but not others; the influence of federal procurement programs in establishing size standards; and the intentional misclassification of federal contracts or the primary industry activity of a business to apply a different, and usually a much higher, size standard.

SBA's last comprehensive attempt to address size standards was in the late 1970s and early 1980s. Although SBA considered several approaches, it made only a few minor changes. In the early 1990s, SBA proposed to streamline size standards with nine levels of size standards (four receipts-based size standards and five employee-based size standards). Public comments tended to favor this approach, but SBA determined that converting receipts-based size standards in effect at that time to one of four proposed receipts levels created a number of unacceptable anomalies, so SBA did not adopt it as a final rule.

Most variations in the size standards occur among those that are based on annual receipts. In many cases, a specific receipts-based size standard applies to only one or a few industries. SBA believes it can simplify the size standards and make them less complicated by establishing a single size standard measure and reducing the number of different size standard levels. The fewer size standards will be clearer, more consistent, and easier to understand, resulting in less confusion to users, particularly the non-governmental users, such as small businesses. In addition, a single size measure eliminates a problem that some concerns encounter when they operate in different industries that have different size standard measures. The information technology industries are a good example of this. Many information technology businesses provide both goods and services. But, for providers of computer and peripheral equipment, SBA's size standards are based on number of employees, and for providers of computer services, SBA's size standards are based on receipts. An information technology business may be small for one type of work but not small for a related activity.

SBA is proposing to restructure its size standards by establishing an employee-based size standard for each industry. The number of employees of a business concern is its average number of persons employed for each pay period over the firm's latest 12 months and includes the employees of all affiliates. Any person on the payroll would be included as one employee regardless of hours worked or temporary status. There would be 10 size standards: 50, 100, 150, 200, 300, 400, 500, 750, 1,000, and 1,500. This restructuring would affect the size standards for 514 industries.

SBA developed criteria for deciding which of the 10 size standards to apply to an industry that currently has a receipts-based size standard. The primary tool used to calculate the equivalent employee size standard associated with a receipts-based size standard is the receipts-to-employee ratio for an industry. Data to calculate these ratios were provided to the SBA by the U.S. Bureau of the Census. Since total receipts in an industry are provided along with employees in the industry, SBA was able to calculate receipts per employee ratios for almost all industries covered by this rule. The resulting figure was divided into the present receipt-based size standard for the industry under review to calculate an employee equivalent size standard. This employee equivalent size standard was then rounded to the closest of the ten employee size standard levels to minimize the difference between the current receipts-based size standard and the calculated employee-based size standard. For example, the present size standard for the Other Airport Operations industry (North American Industry Classification System (NAICS) 488119) is $6 million. Dividing $6 million by $56,969 receipts per employee resulted in the equivalent size standard of 105 employees, which the SBA has rounded to 100 employees.

However, the process is not purely mathematical; SBA took other factors into consideration. For example, Barber Shops (NAICS 81211) has the same $6 million size standard as Other Airport Operations. Dividing $6 million by $34,700 receipts per employee resulted in the equivalent size standard of 172 employees. This level rounds to 150 employees. However, SBA believes that a 150 employee size standard for barber shops is too high, and that the 50 employee size standard better matches the industry structure for barber shops, as well as public perception of what constitutes a small business in this industry. The barber industry has one of the largest concentrations of very small businesses, where the average size barber shop is only three employees.

For closely related industries (those within the same 4-digit NAICS Industry Group or 3-digit NAICS Subsector) that currently have a common receipts-based size standard, SBA proposes a common employee-based size standard, even though a different size standard could be established for each closely related industry based on the receipts-to-employee calculation. SBA recognizes that small businesses are often eligible for SBA assistance in a number of closely related industries, and it simplifies size standards if closely related industries have the same size standard. An example of this is the computer services industries in which businesses typically operate in at least several of the nine computer services industries. After reviewing the equivalent employee-based size standards for the nine computer services industries, SBA recommends a common size standard of 150 employees for all nine computer services industries. Examples of other industries where SBA proposes a common size standard include the consulting service industries, the trucking industries, the warehousing industries, and the waste management industries.

Different calculations and considerations have gone into the size standards for several other industries:

In addition, SBA is proposing that 31 industries have a maximum average annual receipts amount (a "receipts cap") along with the employee-based size standard. To qualify as small, concerns in those industries would have to be no greater in size than the employee-based size standard and have average annual receipts less than the receipts cap amount. SBA proposes that 36 size standards in the following 31 industries have an annual receipts cap along with the proposed employee size standard. In these industries, businesses have more latitude in deciding whether to hire employees to perform work or to subcontract the work to others. For example, general contractors can decide what and how much construction work to perform themselves and what work to subcontract to others. Under a strict employee-based size standard, a business may exceed the size standard because it decides to perform more work in-house while another business performing the same level of work stays under the employee size standard because more work is subcontracted. This is because the employees of a subcontractor are not included in counting the number of employees of a business. The imposition of a receipts cap on these 31 industries will prevent businesses from purposely subcontracting an unusual amount of work relative to customary industry practices to retain small business status. Because of this potential, SBA proposes to establish an average annual receipts cap along with employee size standards in the 31 industries.

To further simplify the size standards, SBA is proposing the following:

Finally, SBA does not propose changing three size standards because they are either established by statute or reflect unique program objectives:

An analysis of the effect the proposed rule would have on small business eligibility shows that, out of approximately 4.4 million businesses in the industries with revised size standards, 35,200 businesses could gain small business eligibility and 34,100 could lose small business eligibility, resulting in a total of 1,110 additional businesses being defined as small.

In the preparation of this proposed rule, SBA considered a number of alternative approaches:

SBA is inviting comments on these alternatives or other alternatives to restructure and simplify size standards. SBA is also inviting comments on the following issues:

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2004 by Panoptic Enterprises. All Rights Reserved.

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