Rule2024-20228
Small Business Size Standards: Revised Size Standards Methodology
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 12, 2024
Issuing agencies
Small Business Administration
Abstract
The U.S. Small Business Administration (SBA or Agency) advises the public that it has revised its size standards methodology white paper, entitled "SBA's Size Standards Methodology (June 2024)" (the Revised Methodology or Methodology), explaining how it establishes, reviews, or revises small business size standards. SBA will apply the Revised Methodology to the forthcoming third five-year review of size standards required by the Small Business Jobs Act of 2010. On December 11, 2023, SBA published a notification seeking comments on proposed revisions to its Methodology. This notification describes major changes to the Methodology and their impacts on size standards, followed by a discussion of the comments SBA received on the proposed revisions to the Methodology and Agency's responses.
Full Text
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<title>Federal Register, Volume 89 Issue 177 (Thursday, September 12, 2024)</title>
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[Federal Register Volume 89, Number 177 (Thursday, September 12, 2024)]
[Rules and Regulations]
[Pages 74109-74131]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-20228]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards: Revised Size Standards Methodology
AGENCY: U.S. Small Business Administration.
ACTION: Notice of availability of white paper on revised size standards
methodology.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) advises
the public that it has revised its size standards methodology white
paper, entitled ``SBA's Size Standards Methodology (June 2024)'' (the
Revised Methodology or Methodology), explaining how it establishes,
reviews, or revises small business size standards. SBA will apply the
Revised Methodology to the forthcoming third five-year review of size
standards required by the Small Business Jobs Act of 2010. On December
11, 2023, SBA published a notification seeking comments on proposed
revisions to its Methodology. This notification describes major changes
to the Methodology and their impacts on size standards, followed by a
discussion of the comments SBA received on the proposed revisions to
the Methodology and Agency's responses.
DATES: September 12, 2024.
ADDRESSES: The 2024 Revised Methodology is available on the SBA's
website at <a href="http://www.sba.gov/size">www.sba.gov/size</a>.
FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Chief, Office of Size
Standards, (202) 205-7189, or <a href="/cdn-cgi/l/email-protection#34475d4e514740555a5055465047744756551a535b42"><span class="__cf_email__" data-cfemail="a4d7cddec1d7d0c5cac0c5d6c0d7e4d7c6c58ac3cbd2">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
A. Background
To determine eligibility for Federal small business assistance
programs, SBA establishes small business size definitions (commonly
referred to as ``size standards'') for private sector industries in the
United States. Under the Small Business Act (the Act), 15 U.S.C. 632(a)
(Pub. L. 85-536, 67 Stat. 232, as amended), the SBA's Administrator
(Administrator) has authority to establish size standards for Federal
Government programs. SBA's existing size standards use two primary
measures of business size: average annual receipts and average number
of employees. Financial assets and refining capacity are used as size
measures for a few specialized industries. In addition, the SBA's Small
Business Investment Company (SBIC), 7(a), and Certified Development
Company (CDC/504) Programs determine small business eligibility using
either the industry-based size standards or tangible net worth and net
income based alternative size standards. Presently, there are 102
different size standards, covering 978 industries and 14 subindustries,
also known as ``exceptions.'' Of these, 505 are based on average annual
receipts, 483 on number of employees (one of which also includes
barrels per calendar day total refining capacity), and four on average
assets.
The Small Business Jobs Act 2010 (Pub. L. 111-240, 124 Stat. 2504,
Sept. 27, 2010) requires SBA to review, every five years, all size
standards and make necessary adjustments to reflect market conditions.
SBA completed the first five-year review of size standards under the
Jobs Act in early 2016 \1\ and completed the second five-year review of
size standards in early 2023.\2\ SBA will begin the next (third) five-
year review of size standards in the near future.
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\1\ See Report on the First Five-Year Comprehensive Review of
Size Standards at <a href="https://www.sba.gov/sites/sbagov/files/2023-09/Report%20on%20the%20First%205-Year%20Comprehensive%20Size%20Standards%20Review-508F.pdf">https://www.sba.gov/sites/sbagov/files/2023-09/Report%20on%20the%20First%205-Year%20Comprehensive%20Size%20Standards%20Review-508F.pdf</a>.
\2\ See Report on the Second Five-Year Comprehensive Review of
Size Standards at <a href="https://www.sba.gov/sites/sbagov/files/2023-07/SBA%27s%20Report%20on%20the%20Second%205%20Year%20Review%20of%20Size%20Standards_Final.pdf">https://www.sba.gov/sites/sbagov/files/2023-07/SBA%27s%20Report%20on%20the%20Second%205%20Year%20Review%20of%20Size%20Standards_Final.pdf</a>.
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The goal of SBA's size standards review is to determine whether its
existing size standards reflect the current industry structure and
Federal market conditions and revise them if the latest available data
suggests that revisions are warranted. The Act requires that the size
standard varies from industry to industry to the extent necessary to
reflect the differing characteristics of the various industries. SBA
evaluates the structure of each industry in terms of four economic
characteristics or factors, namely average firm size, average assets
size as a proxy of startup costs and entry barriers, the four-firm
concentration ratio as a measure of industry competition, and size
distribution of firms using the Gini coefficient (13 CFR 121.102(a)).
Besides industry structure, SBA also examines the impact of an existing
size standard as well as the potential impact of a revised size
standard on small business participation in Federal contracting as an
additional primary factor when establishing, reviewing, or modifying
the size standards. SBA generally considers these five factors--average
firm size, average assets size, four-firm concentration ratio, Gini
coefficient, and small business participation in Federal
[[Page 74110]]
contracting--to be the most important factors in determining an
industry's size standard. The 2024 Revised Size Standards Methodology
White Paper provides a detailed description of evaluation of these
factors (including relevant data sources) and derivation of size
standards based on the results.
SBA also periodically adjusts all monetary based standards for
inflation. In accordance with SBA's regulations (13CFR 121.102(c)) and
rulemaking (67 FR 3041; January 23, 2002), an adjustment to size
standards for inflation is made at least once every five years. In
response to higher than normal rates of inflation, some past inflation
adjustments have been made on more frequent intervals. For example, in
response to ongoing higher than normal inflation, SBA issued an out-of-
cycle inflation adjustment to monetary based size standards on November
17, 2022 (87 FR 69118). The SBA's Methodology also explains how it
adjusts monetary based size standards for inflation. SBA also updates
its size standards, every five years, to adopt the Office of Management
and Budget's (OMB) quinquennial North American Industry Classification
System (NAICS) revisions to its table of small business size standards.
Effective October 1, 2022, SBA adopted the OMB's 2022 NAICS revisions
(86 FR 72277; December 21, 2021) for its table of small business size
standards (87 FR 59240; September 29, 2022). The Methodology also
explains the SBA's procedures for adopting updated NAICS definitions
for the table of size standards.
Section 3(a) of the Act provides the Administrator with authority
to establish small business size standards for Federal Government
programs. The Administrator has discretion to determine precisely how
SBA should establish small business size standards. The Act and its
legislative history highlight three important considerations for
establishing size standards. First, as stated earlier, size standards
should vary from industry to industry according to differences among
industries. 15 U.S.C. 632(a)(3). Second, a firm that qualifies as small
under the SBA's size standard shall not be dominant in its field of
operation. 15 U.S.C. 632(a)(1). Third, pursuant to 15 U.S.C. 631(a),
the policies of the Agency should assist small businesses as a means of
encouraging and strengthening their competitiveness in the economy.
These three considerations continue to form the basis for the SBA's
methodology for establishing, reviewing, or revising small business
size standards.
The 2024 Revised Methodology, available on the SBA's website at
<a href="http://www.sba.gov/size">www.sba.gov/size</a>, describes in detail how SBA establishes, evaluates,
and adjusts its small business size standards pursuant to the Act and
related legislative guidelines.\3\ Specifically, the document provides
a brief review of the legal authority and early legislative and
regulatory history of small business size standards, followed by a
detailed description of the size standards analysis. Below, SBA
provides a brief summary of the revisions to SBA's Methodology, which
are described in greater detail in the 2024 Revised Methodology.
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\3\ Prior to finalizing the 2024 Methodology for establishing,
reviewing, modifying size standards, SBA issued a notification in
the December 11, 2023, issue of the Federal Register (88 FR 85852)
to solicit comments from the public and notify stakeholders of the
proposed changes to the Methodology. As discussed under the
``Discussion of Comments'' section of this notification, SBA
considered all public comments in finalizing the 2024 Methodology.
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B. Revisions to SBA's Size Standards Methodology
SBA's 2024 Revised Methodology describes various changes and
revisions to the 2019 Methodology and provides a detailed history of
changes to SBA's Methodology for evaluating size standards over the
years. In the past, including the first five-year review of size
standards under the Jobs Act, to determine an overall size standard for
each industry, SBA compared the characteristics of each industry with
the average characteristics of a group of industries associated with an
``anchor'' size standard. For example, in the first five-year review of
size standards, $7 million (now $9 million due to the inflation
adjustments in 2014, 2019, and 2022) was considered the ``anchor'' for
receipts-based size standards and 500 employees was considered the
``anchor'' for employee-based size standards. If the characteristics of
a specific industry under review were similar to the average
characteristics of industries in the anchor group, SBA generally
adopted the anchor size standard for that industry. If the specific
industry's characteristics were significantly higher or lower than
those for the anchor group, SBA assigned a size standard that was
higher or lower than the anchor.
In response to public comments received during the first five-year
review of size standards concerning SBA's size standards methodology,
section 3(a)(7) of the Act (which limits the SBA's ability to create
common size standards by grouping related industries below the four-
digit NAICS level), and its own review of the Methodology, in the 2019
Methodology, SBA replaced the ``anchor'' approach with the
``percentile'' approach, as the basis of evaluating industry factors
(i.e., average firm size, average assets, the four-firm concentration
ratio, and the Gini coefficient) and deriving a size standard for each
industry factor for each industry.\4\ Under the ``percentile''
approach, for each factor, an industry is ranked and compared with the
20th percentile and 80th percentile values of that factor among the
industries sharing the same measure of size standards (i.e., receipts
or employees). Combining that result with the 20th percentile and 80th
percentile values of size standards among the industries with the same
measure of size standards, SBA computes a size standard supported by
each industry factor for each industry, then computes a weighted
average of the resulting supported size standards to obtain an overall
size standard for each industry.
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\4\ For a detailed justification for replacement of the
``anchor'' approach to size standards analysis with the
``percentile'' approach and a detailed description of the percentile
approach, see the SBA's 2019 Size Standards Methodology White Paper,
available on SBA's website at <a href="https://www.sba.gov/sites/default/files/2023-12/SBA%20Size%20Standards%20Methodology%20April%2011%2C%202019-508.pdf">https://www.sba.gov/sites/default/files/2023-12/SBA%20Size%20Standards%20Methodology%20April%2011%2C%202019-508.pdf</a>.
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In the 2024 Revised Methodology, SBA is maintaining the
``percentile'' approach as a basis of evaluating industry factors and
deriving size standards for each industry factor for each industry;
however, based on its review of the current methodology, SBA is
adopting two major changes to its size standards methodology.
The first major change is to replace the current approach used to
account for the Federal contracting factor with the disparity ratio
approach. Under the 2019 Methodology, SBA defined the Federal
contracting factor for each industry averaging $20 million or more in
Federal contracts annually as the difference between the small business
share of total contract obligations and the small business share of
industry' receipts. If the small business share of an industry total
receipts exceeds the small business share of total contract obligations
by ten percentage points or more, all else being the same, SBA would
increase that industry's current size standard by a certain amount
depending on the amount of that difference. If that difference is less
than ten percentage points, SBA considers that the current size
standard is sufficient with respect to the Federal contracting factor.
Under the disparity ratio approach, SBA computes a disparity ratio
as a
[[Page 74111]]
ratio (instead of the difference) between the small business share of
contract obligations (utilization ratio) and the small business share
of industry receipts (availability ratio). SBA also computes a second
disparity ratio as a ratio between small business share of the number
of contracts (utilization ratio) and the share of small firms in the
total population of firms that are willing, ready, and able to bid on
and perform Federal contracts (availability ratio).
If an industry's disparity ratio is less than 0.8, SBA would assume
that small businesses are either materially underrepresented (i.e., the
disparity ratio is 0.5 or greater and less than 0.8) or substantially
underrepresented (i.e., the disparity ratio is less than 0.5) in the
Federal market under that industry's current size standard and would
generally propose to increase the current size standard. If an
industry's disparity ratio is 0.8 or higher, small businesses are
considered overrepresented (i.e., the disparity ratio is 0.8 or higher
and less than 1.2) or substantially overrepresented (i.e., the
disparity ratio is 1.2 or higher) in the Federal market in that
industry under the current size standard, and the size standard is
maintained at the current level.
The second proposed major change is to replace the 20th percentile
and 80th percentile values of industry factors for evaluating size
standards at subindustry levels (``exceptions'') currently calculated
based on the Economic Census data with those calculated using the
Federal Procurement Data System--Next Generation (FPDS-NG) and the
System for Award Management (SAM) data.
SBA is adopting these changes in order to refine and improve its
analysis of Federal contracting data used in the evaluation of industry
size standards. These changes are also in response to public comments
received during the second five-year review of size standards that
pertained to Federal contracting trends generally. Although SBA did not
specifically seek comments to the 2019 Methodology as part of the
series of proposed rules issued to review size standards under the
second five year review,\5\ SBA notes that a number of commenters to
SBA's proposed rules expressed positions both for and against SBA's
proposed size standards based on Federal contracting trends, data, or
analysis.\6\ Thus, given the demonstrated relevance of Federal
contracting trends to small businesses, SBA believes that it is
important to continually review and adjust its methodology for
evaluating Federal contracting data to ensure its analysis accurately
captures the varying impact of Federal contracting trends by industry.
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\5\ See Small Business Size Standards: Agriculture, Forestry,
Fishing and Hunting; Mining, Quarrying, and Oil and Gas Extraction;
Utilities; Construction (85 FR 62239; October 2, 2020), Small
Business Size Standards: Transportation and Warehousing;
Information; Finance and Insurance; Real Estate and Rental and
Leasing (85 FR 62372; October 2, 2020), Small Business Size
Standards: Professional, Scientific and Technical Services;
Management of Companies and Enterprises; Administrative and Support
and Waste Management and Remediation Services (85 FR 72584; November
13, 2020), Small Business Size Standards: Education Services; Health
Care and Social Assistance; Arts, Entertainment and Recreation;
Accommodation and Food Services; Other Services (85 FR 76390;
November 27, 2020), and Small Business Size Standards: Wholesale
Trade and Retail Trade (86 FR 28012; May 25, 2021), Small Business
Size Standards: Manufacturing and Industries With Employee-Based
Size Standards in Other Sectors Except Wholesale Trade and Retail
Trade (87 FR 24752; April 26, 2022). Comments available at
<a href="http://www.regulations.gov">www.regulations.gov</a>.
\6\ Prior to finalizing the 2019 Methodology for revising size
standards under the second five-year review, SBA issued a
notification in the April 27, 2018, issue of the Federal Register
(83 FR 18468) to solicit comments from the public and notify
stakeholders of the proposed changes to the 2019 Methodology. SBA
considered all public comments in finalizing the 2019 Methodology.
For a summary of comments and SBA's responses, refer to the SBA's
April 11, 2019, Federal Register notification (84 FR 14587).
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To determine how the above changes in the Methodology would affect
size standards across various industries and sectors, SBA derived the
new size standards for all industries averaging $20 million or more in
Federal contract dollars annually (excluding Sectors 42 and 44-45)
using the 2019 Methodology and the disparity ratio approach of defining
the Federal contracting factor under the 2024 Methodology. Overall, the
calculated size standards were quite similar between the two approaches
when compared to the existing size standards, with size standards
increasing for some industries and decreasing for others under both
approaches.
SBA believes that using FPDS-NG and SAM data to obtain the 20th
percentile and 80th percentile values of industry factors for
evaluating size standards for the exceptions, instead of using the
percentiles from the Economic Census, will promote consistency in its
analysis of the exceptions by ensuring that the percentile values and
factor values for each exception are in comparable terms. Specifically,
SBA has found that for most industries, the average firm size of
businesses participating in Federal contracting is generally larger
than the average firm size of businesses represented in the Economic
Census. There are also inconsistencies in data reporting between SAM/
FPDS-NG data and the Economic Census, which SBA will address by
adopting the revised approach. Thus, SBA believes that using FPDS-NG
and SAM to obtain the percentile values of industry factors for the
exceptions will better reflect the varying economic characteristics of
the underlying industries. The full results of SBA's impact analysis as
well as a detailed description of the major changes to SBA's evaluation
of size standards are included in the 2024 Revised Methodology.
In the 2024 Revised Methodology, SBA is also updating the minimum
and maximum size standard levels based on current minimum and maximum
size standard levels. The minimum size standard generally reflects the
size a small business should be to have adequate capabilities and
resources to be able to compete for and perform Federal contracts. On
the other hand, the maximum size standard represents the level above
which businesses, if qualified as small, would cause significant
competitive disadvantage to smaller small businesses when accessing
Federal assistance. SBA will not generally propose or adopt a size
standard that is either below the minimum or above the maximum level,
even though the calculations might yield values below the minimum or
above the maximum level.
With respect to receipts-based size standards, SBA is adopting $8
million and $47 million, respectively, as the minimum and maximum size
standard levels (except for most agricultural industries in Subsectors
111 and 112). These levels reflect the current minimum and the current
maximum of receipts-based size standards. As in the 2019 Methodology,
the latest industry data from the 2017 Census of Agriculture suggests
that $8 million minimum and $47 million maximum size standard levels
would be too high for agricultural industries in Subsector 111 and
Subsector 112. Accordingly, SBA is adopting $2.25 million and $5.5
million, respectively, as the minimum and maximum size standard levels
for agricultural industries in Subsectors 111 and 112 (excluding NAICS
112112 and NAICS 112310). These levels represent the current minimum
and current maximum levels of size standards in Subsectors 111 and 112
(excluding NAICS 112112 and NAICS 112310).\7\
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\7\ NAICS 112112 (Cattle Feedlots) and NAICS 112310 (Chicken Egg
Production) currently have a size standard of $22 million and $19
million, respectively, and will be subjected to the $8 million
minimum and $47 million maximum size standards proposed for other
industries with receipts-based size standards.
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[[Page 74112]]
Regarding employee-based size standards for manufacturing and other
industries that have employee-based size standards (excluding Wholesale
and Retail Trade), SBA's 250-employee minimum and 1,500-employee
maximum are the current minimum and maximum employee based size
standards among those industries. For employee-based size standards for
Wholesale Trade and Retail Trade industries, the minimum and maximum
size standards levels are 50 employees and 250 employees,
respectively.\8\
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\8\ Current employee-based size standards for the wholesale and
retail trade industries range from 100 employees to 250 employees.
However, as in the 2019 Methodology, SBA is proposing a lower 50-
employee level as the minimum employee-based size standard to
account for differences among industries more accurately.
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SBA is also updating the percentile values, derived from the latest
2017 Economic Census and other industry data, used to evaluate the
structure of each industry in terms of the four economic
characteristics or factors, namely average firm size, average assets
size, the four-firm concentration ratio, and the Gini coefficient. As
explained in the 2024 Revised Methodology, SBA ranks industries by size
standard types in terms of the four industry factors and in terms of
the existing size standards, then computes the 20th percentile and 80th
percentile values for both. SBA then evaluates each industry by
comparing its value for each industry factor to the 20th percentile and
80th percentile values for the corresponding factor for industries
under a particular type of size standard. The updated 20th percentile
and 80th percentile values for the four factors for receipts-based and
employee-based size standards are found in Table 5 and Table 6 of the
2024 Revised Methodology, respectively; the updated 20th percentile and
80th percentile values of size standards are found in Table 7.
C. Discussion of Comments
On December 11, 2023, SBA published a notification in the Federal
Register seeking comments on the above changes to its size standards
methodology and a number of policy issues or questions it faces
regarding the size standards methodology (88 FR 85852). Pursuant to
section 1344 of the Jobs Act, on June 23 and 25, 2023, SBA also held
two public forums on size standards to update the public on the status
of the quinquennial reviews of size standards under the Jobs Act and
seek public feedback on proposed revisions to the size standards
methodology.
SBA received a total of 21 comments (including one received during
the public forums on size standards), of which 19 were significant. Of
these 19 comments, two represented SBA's administrative records of two
public forums designed to update the public on the status of
quinquennial reviews of size standards under the Jobs Act and seek
feedback on SBA's Revised Methodology, which will be used to review and
adjust size standards under the forthcoming third five-year review of
size standards. Public comments are summarized below and are available
on the Federal Government e-rulemaking portal at <a href="http://www.regulations.gov">www.regulations.gov</a>.
1. General Support/Comment
SBA received four comments that expressed full support for its
Revised Methodology. One commenter found the Revised Methodology to be
a reasonable and consistent approach to establish, review, and modify
size standards. The commenter appreciated the SBA efforts to
incorporate the recent amendments to the Small Business Act and to
address the public comments to the 2019 Methodology. Specifically, the
commenter commended the SBA for making certain analytical improvements,
such as adopting a percentile approach, assigning a separate size
standard for each NAICS industry, lowering the threshold for the
Federal contracting factor, and applying the 4-firm concentration ratio
to all industries. The commenter believed that these changes would
better reflect the current market conditions and ensure that the size
standards are in accordance with the legislative guidelines. Overall,
the commenter supported the Revised Methodology, and urged SBA to
finalize and publish it as soon as possible. The commenter stated that
the Revised Methodology will provide a fair and consistent definition
of a small business and will enable SBA to fulfill its mission of
assisting and promoting the small business community.
Another commenter, a service-disabled veteran-owned small business
(SDVOSB), extended its full support for the SBA's proposed revisions to
the Methodology. The commenter believed that proposed revisions are a
significant step toward creating a more equitable, competitive, and
dynamic small business landscape. SBA received two comments that also
supported SBA's proposed revisions to the Methodology but did not
provide any reasons for their support.
A women-owned small business advocacy group submitted a comment to
the SBA Revised Methodology. The commenter neither opposed nor
supported the proposed revisions to the Methodology. Similarly, an
industry association circulated the Revised Methodology to its 400-plus
members and solicited their feedback. The members' input neither
supported nor opposed the overall Methodology but agreed with the SBA
position on a number of policy issues and questions regarding the
Methodology.
SBA Response
In absence of significant adverse comments against the Revised
Methodology generally, SBA is adopting it as published for comments
even though a couple of comments, as discussed below, objected using
the FPDS-NG and SAM data to compute the 20th percentile and 80th
percentile values of industry factors to evaluate the size standards at
the subindustry levels, usually known as ``exceptions.'' One comment,
also discussed below, opposed using the maximum size standards caps in
calculating new size standards for each industry factor as well as in
calculating the overall size standard for the industry. SBA did not
receive any comment that objected to the adoption of the disparity
ratio approach to account for small business participation in the
Federal market.
2. Comments on Specific Issues/Questions Pertaining to the Methodology
SBA sought feedback on a number of specific policy issues and
questions it faces regarding the Methodology for establishing,
reviewing, and modifying size standards. A number of commenters
specifically addressed these issues, as discussed below.
Should SBA establish size standards that are higher than industry's
entry-level business size?
Three commenters addressed this issue. A commenter concurred with
the SBA's position that size standards must be established above the
entry-level size to ensure small businesses have the necessary
resources and capabilities to be able to perform and meet Federal
Government contracting requirements. Another commenter supported the
SBA's approach to establishing size standards that reflect the current
realities of industry-specific dynamics, including setting standards
above entry-level business sizes. This approach ensures that businesses
with a footprint slightly above the ``entry level'' can still access
vital resources and opportunities, fostering growth and innovation
within their respective fields, the commenter added. SBA received
another comment
[[Page 74113]]
from an industry association saying that SBA should continue using the
size standards that are higher than the industry's entry-level business
size. The commenter agreed with the SBA's position that establishing
size standards at the industry entry-level firm size would cause small
businesses to outgrow their eligibility very quickly, thereby lacking
sufficient experience to succeed outside the small business market.
More importantly, such size standards would likely lead to the
undesirable outcome of fewer companies competing for Federal contracts,
the commenter noted.
SBA Response
In the absence of adverse comments against establishing the size
standard above the entry-level business size, SBA adopts its approach
of setting size standards higher than the entry-level business size to
enable small businesses to compete against others of their size and
considerably larger businesses for Federal contracts set-aside for
small businesses. It is important that small businesses can apply for
and be eligible for the various SBA's contracting and business
development programs that have additional requirements, such as a
minimum number of years in business to qualify for its 8(a) Business
Development Program. This precludes setting size standards at too low a
level or at the entry-level size. Additionally, establishing size
standards at the industry entry-level firm size would cause small
businesses to outgrow their eligibility very quickly, thereby lacking
sufficient cushion or experience to succeed outside of the small
business market. Finally, size standards must be above the entry-level
size to ensure that small businesses have necessary resources and
capabilities to be able to bid on and perform Federal contracts.
Should there be a ceiling beyond which a business concern cannot be
considered as small? In other words, should there be a maximum size
standard?
SBA received three comments addressing this issue, with two
supporting and one opposing the SBA's position. One commenter supported
the introduction of a maximum size standard because it is beneficial
for maintaining the integrity of small business programs. The commenter
asserted that establishing a maximum size standard cap ensures that
Federal small business programs remain accessible to businesses that
genuinely need them while preventing larger entities from overshadowing
the competitive landscape for true small businesses, including SDVOSBs.
A maximum size standard would serve as a safeguard, ensuring that the
small business benefit is preserved for those it is intended to
support, the commenter added.
SBA received a comment from an industry association supporting the
SBA's policy to continue maintaining the minimum and maximum levels for
both receipts- and employee-based size standards. The commenter agreed
with the SBA's position that, without the maximum caps as defined by
the Revised Methodology, the calculated size standards would be
extremely large for some industries, allowing very successful
businesses with hundreds of millions in receipts or tens of thousands
of employees to qualify as small for Federal assistance intended for
small businesses.
SBA received a comment disagreeing with SBA's proposed maximum caps
of $47 million for revenue-based size standards and 1,500 employees for
employee-based size standards. The commenter explained that size
standards would better reflect the economic characteristics of
industries if there were no caps on size standards and instead SBA
permitted its industry-specific analysis of the data to determine the
appropriate size standard for the industry. If SBA feels caps are
necessary, the commenter urged SBA to provide a sound economic analysis
to justify the application of caps. The caps result in lower size
standards than would otherwise be calculated, and the Methodology no
longer aspires to find a true economically appropriate size standard,
the commenter argued. The commenter asserted that arbitrary caps are
inconsistent with the requirement that size standards vary from
industry to industry according to differences among industries and
SBA's polices of encouraging and strengthening competition in the
economy. Because of the introduction of caps, SBA runs the risk of
being perceived to favor the smallest small businesses at the expense
of the larger small businesses, the commenter noted. The commenter
urged SBA to let the data drive the results instead of policies.
SBA Response
SBA agrees with the industry association that, without the maximum
caps, the calculated size standards would be extremely high, allowing,
in some cases, extremely large companies with billions of dollars in
revenues and tens of thousands of employees to qualify as small
business. Capping calculated size standards at certain minimum and
maximum levels is crucial for fulfilling the SBA's mission to serve and
protect the interests of American small businesses and ensuring that
Federal small business assistance goes to small businesses most in need
of such assistance. For this reason, in the Revised Methodology, SBA
retains its policy of capping the calculated receipts-based size
standards at $47 million and calculated employee-based size standards
at 1,500 employees. SBA has maintained its employee-based maximum size
standard cap at the 1,500 employees despite the increased automation
and resultant labor productivity growth. However, the receipts-based
size standards have gradually increased over time due to inflationary
adjustments, and the highest receipts-based size standard stands at $47
million today.
Should SBA consider adjusting employee-based size standards for
labor productivity growth or increased automation?
Four comments addressed this issue. SBA received a comment
justifying the lack of SBA's adjustment to employee-based size
standards for labor productivity growth and technical changes because
it is difficult to measure and compare the productivity and technology
levels across industries and over time.
Another comment argued that, without seeing a specific proposal, it
is difficult to comment on whether SBA should consider adjusting
employee-based size standards for labor productivity growth or
increased automation. However, the commenter recommended proceeding
cautiously, as small businesses might not have the necessary capital to
take advantage of automation and robotics.
Another commenter argued that the rapid pace of technological
advancement and its impact on labor productivity and automation
necessitates adjustments to employee-based size standards and suggested
that SBA incorporate considerations for labor productivity growth and
automation into its Methodology. This adjustment would ensure that size
standards remain relevant and that businesses utilizing technology to
enhance productivity or automate processes are not unfairly classified
as small due to efficiency gains, the commenter added.
SBA received a comment supporting the SBA's current approach of not
adjusting employee-based size standards for labor productivity growth.
By updating size standards every five years, those factors are already
captured in SBA's analysis of the industry structure, the commenter
added. The commenter argued that any separate adjustments
[[Page 74114]]
would simply double count the impact of the productivity changes that
are already reflected in the industry data.
SBA Response
Of the four comments addressing this issue, three supported the
SBA's current approach of not adjusting employee-based size standards
for increased automation and labor productivity growth, even though the
Agency adjusts monetary-based size standards for inflation. Just as
firms in industries with monetary-based size standards may lose small
business eligibility due to inflation, firms in industries with
employee-based standards may gain eligibility due to improvement in
labor productivity and technical change. There are three reasons for
SBA for not adjusting employee-based size standards for productivity
growth and technical change. First, there does not exist robust labor
productivity growth data by 6-digit NAICS industry. Second, SBA agrees
with one of the commenters supporting no labor productivity adjustment
of employee-based size standards that the impact of changes in labor
productivity are already reflected in the quinquennial Economic Census
data that SBA uses to evaluate industry structure. Third, just as an
adjustment to monetary-based size standards for inflation leads to
increases in size standards, thereby allowing businesses to gain or
maintain their small business status, an adjustment to employee-based
size standards for labor productivity growth would lead to decreases in
size standards, thereby causing currently small businesses to lose
their small business status and eligibility for Federal small business
assistance, which may run counter to the SBA's policy of not lowering
size standards under distressed economic environment. For these
reasons, in the Revised Methodology, SBA maintains its policy of not
adjusting employee-based size standards for labor productivity growth.
Should SBA consider lowering its size standards generally?
Four comments addressed this issue. One commenter opposed lowering
size standards arguing that many businesses have made investments based
upon their ability to access small business set-aside markets and
lowering size standards would unfairly penalize them.
Citing the ongoing decline in the number of small businesses
participating in the Federal marketplace, one commenter opposed
lowering size standards. The commenter argued that lowering size
standards will not only exacerbate this situation but also harms small
businesses and deprives agencies of increased competition and the
experienced small business vendor base. Instead of lowering size
standards, the commenter added, SBA should look into raising size
standards, thereby allowing more small businesses to remain in the
Federal market longer. The commenter asserted that raising size
standards would both expand the small business industrial base for
Federal agencies and extend the runway for these firms as they grow and
have a chance to successfully graduate from their status as small
businesses. The commenter maintained that, by lowering size standards,
SBA will decrease the pool of eligible offerors under the Rule of Two,
and thus lowering size standards would lead to fewer small business
set-asides overall due to the reduced applicability of the Rule of Two.
An industry association recommended that SBA should not lower size
standards. The association did not believe that lowering size standards
would support the Administration's and SBA's goals to reverse a
downward trajectory of fewer small businesses receiving Federal prime
contracts. The association maintained that lowering size standards
generally may further squeeze successful small businesses, limit
returns on the Government's investments in small business growth and
deprive agencies of increased competition. To support its argument, the
commenter cited the Government Accountability Office (GAO) finding that
only 22% of graduating businesses remain mid-size and only three
percent of graduating businesses break through mid-size status to
large. The commenter maintained that contracting trends also do not
support lowering size standards as individual set-aside contracts have
increased in value such that small businesses may be catapulted beyond
their size standards, often in a single contract or task order. These
small businesses face a tough situation: unable to remain qualified as
``small,'' they must survive in ``full and open'' competitions with
larger companies.
A commenter representing the elevator industry believed that with
increased inflation and raw materials costs, especially in
construction-related industries with significant material outlays,
broad-based lowering of size standards would be short-sighted and
should not be enacted.
SBA Response
All four comments addressing this issue opposed lowering size
standards, generally. SBA receives periodic comments from the public
that its size standards are too high in certain industries or for
certain types of Federal contracting opportunities. The comments
generally concern the competitive edge that large small businesses have
over the ``truly small businesses'' (a phrase heard frequently from
commentators). On the other hand, SBA also receives comments from
larger small businesses that their size standards are too small to
qualify for Federal contracting opportunities and other Federal small
business assistance. This has always been a challenging issue, one that
SBA has had to deal with over the years. SBA's size standards appear
too large to the smallest of small businesses while larger small
businesses often request even higher size standards. SBA examines four
industry factors (average firm size, average assets size as a proxy of
startup costs and entry barriers, 4-firm concentration ratio, and Gini
coefficient) and small business participation in Federal contracting to
determine if the existing industry size standards need to be adjusted.
SBA considers analytical results, impacts of new size standards on
small businesses, public feedback on proposed size standards, and the
prevailing market conditions to decide on whether the size standard
should be raised, lowered, or retained at the current level. SBA may
lower calculated size standards if they are found to have enabled a
dominant firm to qualify as small.
Should SBA lower size standards regardless of prevailing economic
conditions when the analytical results support lowering them, or should
it consider the prevailing economic environment when deciding on
whether to revise size standards?
Three comments addressed this issue. One commenter supported the
SBA's policy of not lowering size standards during periods of
fluctuating economic conditions. The commenter argued that businesses
do better when there is certainty in the rules, thereby allowing them
to plan for the future.
An industry association recommended that if SBA were to consider
lowering size standards, such action should not be tied to the
prevailing economic conditions. Rather, any such reduction should be
based on an assessment of fluctuations in contracting that cannot be
attributed to a single factor or economic period. It noted that the
prevailing economic conditions are only one factor to consider and only
represent a snapshot in time, instead of market understanding over
time.
SBA received a comment applauding SBA's effort to review size
standards on a five-year basis and to raise standards
[[Page 74115]]
to counter the effects of inflation, thereby expanding opportunities
for more small businesses to support Federal clients. Despite these
efforts, however, the GAO and others have cited a decline in the number
of small businesses supporting the Federal marketplace, the commenter
noted. They also noted a significant drop in businesses out of the
Federal market once they cross the ``valley of death'' into ``other
than small'' business status, where businesses struggle to secure
contract opportunities. Lowering size standards will only further
exacerbate this situation, depriving agencies of both increased
competition and skilled and experienced workforce. Instead, SBA should
look into raising size standards to allow more small businesses to
remain in the Federal marketplace longer, the commenter noted. The
commenter stated that this would both expand the small business base
for Federal agencies and improve the runway for these firms as they
grow and ultimately graduate.
SBA Response
Prior SBA policy has been to consider the prevailing economic
environment when deciding on whether to revise size standards. In
response to the distressed economic environment in the aftermath of the
2007-2009 Great Recession, in the first five-year review of size
standards under the Jobs Act, SBA adopted a policy of not lowering size
standards even though the data supported lowering them for some
industries. Similarly, in response to the COVID-19 pandemic and its
impacts on small businesses and the overall economy, during the second
five-year review of size standards under the Jobs Act, SBA adopted a
similar policy of not lowering any size standards even though the
analytical results supported lowering them. SBA will continue to
consider the prevailing economic conditions and their impacts on small
businesses in revising size standards as a secondary factor in its
analysis.
Should SBA adopt the disparity ratio approach to evaluating small
business participation in the Federal market, which will replace the
Federal contracting factor the Agency used in the past? Should SBA
adopt the results from the power analyses of the disparity ratios?
Four comments addressed this issue, all supporting the SBA's new
disparity approach to account for Federal contracting trends. One
commenter supported the new disparity ratio approach to evaluating
small business participation in the Federal market, arguing that this
new approach would better capture the entire spectrum of small business
participation in Federal contracting. Another commenter also expressed
strong support for the SBA's proposed adoption of the disparity ratio
approach to account for small business participation in the Federal
market. The commenter added that the proposed approach promises a more
equitable and accurate reflection of small business participation in
the Federal market, thereby making size standards that are more aligned
with actual market participation and potential and enhancing ability of
small businesses to secure Federal contracts. Another commenter also
supported SBA's new disparity ratio approach to measure small
businesses' share of Federal contracting in relation to the broader
industry.
An industry association recommended that SBA use the disparity
ratio approach where it might lead to increased participation from
under-represented industries. The association members believed the
disparity ratio approach might, in some industries where small
businesses are not well represented as prime contractors, help draw
more contractors into the Federal space by increasing size standards.
The industry association's view is that power analyses should not be
used because they do not consider the actual performance of small
businesses.
SBA Response
Absent significant adverse comments, SBA is adopting the disparity
ratio approach to measure the Federal contracting factor as proposed.
In the previous Methodology, SBA only considered the small business
share of Federal contract dollars relative to the small business share
of total industry receipts. Under the disparity ratio approach, SBA is
also considering the number of Federal contracts awarded to small
businesses relative to their proportion in the population of firms that
are ready, willing, and able to bid on and perform Federal contracts.
Thus, the disparity ratio provides a more accurate representation of
small business participation in the Federal market. Since only a very
few industries were impacted by the power analyses, SBA has decided to
not use the results from the power analyses, consistent with the
industry association's recommendation.
Should SBA continue using the Economic Census data to obtain the
20th percentile and 80th percentile values of industry factors for
evaluating size standards for exceptions, or should it start using
FPDS-NG and SAM data?
Three comments addressed this issue, with one supporting the SBA's
proposal and two opposing it. One commenter supported the use of FPDS-
NG and SAM data for industry analysis for exception size standards. It
makes sense that SBA should use the same consistent source of data
throughout the analysis where possible, the commenter added.
Another commenter disagreed with the SBA's proposal to use FPDS-NG
and SAM data to obtain the 20th percentile and 80th percentile values
of industry factors for evaluating size standards for the NAICS
exceptions. The commenter contended that the use of FPDS-NG and SAM
data would limit the SBA's analysis to the subset of companies engaged
in Federal contracting only. Many small businesses rely on these size
standards for purposes other than Federal contracting, the commenter
added. The commenter recommended continuing to use the Economic Census
data to obtain the 20th percentile and 80th percentile values of
industry factors for evaluating size standard exceptions.
Based on the input from its members, an industry association also
recommended that SBA continue using Economic Census data because it
captures firms not currently working in the Federal space and is
therefore consistent with the intent of the Methodology. The
association explained that if SBA were to rely on FPDS-NG and SAM data,
the results would incorporate only a subset of firms working in a given
industry that hold Federal contracts. Using Economic Census data paints
a more accurate picture of firms operating in the various industries,
in and out of Government, the commenter added.
SBA Response
The data from the Census Bureau's Economic Census tabulation are
limited to the six-digit NAICS industry level and therefore do not
provide information on economic characteristics of firms at the
subindustry level. Thus, SBA uses the FPDS-NG and SAM data to derive
the industry factors for exceptions. To be consistent, SBA is proposing
to adopt the FPDS-NG and SAM data to obtain the 20th percentile and
80th percentile values of industry factors for evaluating size
standards for the NAICS exceptions, instead of using the percentiles
from the Economic Census. SBA believes that using the FPDS-NG and SAM
data to obtain the 20th percentile and 80th percentile values of
industry factors for evaluating size standards for the exceptions,
instead of using the percentiles from the Economic Census, will promote
[[Page 74116]]
consistency in its analysis of the exceptions by ensuring that the
percentile values and factor values for each exception are in
comparable terms. Specifically, SBA has found that for most industries,
the average firm size of businesses participating in Federal
contracting is generally much larger than the average firm size of
businesses represented in the Economic Census. There are also
inconsistencies in reporting between the SAM/FPDS-NG data and the
Economic Census, which SBA will address by adopting the revised
approach. Thus, SBA believes that using the FPDS-NG and SAM data to
obtain the percentile values of industry factors for the exceptions
will better reflect the varying economic characteristics of the
underlying industries. The full results of SBA's impact analysis as
well as a detailed description of the major changes to SBA's evaluation
of size standards are included in the 2024 Revised Methodology.
Should size standards vary from program to program?
SBA received two comments addressing this issue, with both
expressing support for the SBA's position of not varying the size
standards from program to program. One commenter opposed size standards
to vary from program to program because many small businesses
participate in more than one SBA's program. The commenter argued that
changing size standards from program to program would create
substantial confusion.
An industry association recommended that, absent a clear benefit,
size standards should not vary from program to program. The association
believed that size standards need to be clearly understood by the
acquisition community so that set-aside decisions and subcontracting
goals can be realistically established. Adding additional sets of
standards by program in addition to varying them from industry to
industry would add multiple layers of complexity for small firms that
may not have the resources to develop additional staff expertise in
tracking the applicability of size standards for each program,
especially for those involved in multiple programs, the commenter
added.
SBA Response
Consistent with the above comments, for all industries except for
Wholesale Trade and Retail Trade industries, where businesses for SBA's
financial and other Federal non-procurement programs qualify under the
industry-specific size standards and those for Federal procurement
qualify under the 500-employee nonmanufacturer size standard, SBA
retains its policy of maintaining the uniform size standard for both
procurement and non-procurement programs. SBA had, in the 1980s,
established different size standards for different programs. The result
had been that some firms were small for some programs and large for
others. Such size standards were very confusing to users and caused
unnecessary and unwanted complexity in their application. The statutory
guidance encourages an industry-by-industry analysis and not a program-
by-program analysis when developing small business size definitions.
While the characteristics and needs of a particular SBA's program may
necessitate the deviation from the uniform size standards, the Agency
will continue its general policy of favoring one set of size standards
for all programs. For example, SBA has established 14 special size
standards for specific activities (commonly referred to as
``exceptions'') within certain industries for Federal procurement
purposes. Additionally, for the SBA's SBIC, 7(a), and CDC/504 Programs,
businesses can qualify either based on industry specific size standards
for their primary industries or based on a tangible net worth and net
income based alternative size standard.
Should size standards apply nationally or should they vary
geographically?
Five comments addressed this issue, all opposing size standards
varying geographically. One commenter asserted that size standards
should apply nationally, not geographically, but did not provide
reasons for its position. Another commenter also opposed geographically
differing size standards. The commenter argued that the notion of
geographically differing size standards is not reflective of the
reality of the modern-day global economy, in which vendors and
suppliers operate remotely and across multiple states and national
boundaries. The commenter urged SBA to maintain uniform industry size
standards across geographic regions.
An industry association recommended that size standards should
apply nationally, rather than geographically. The association agreed
with the SBA's position that application of Economic Census data to
determine size standards geographically would be at a minimum
cumbersome and time consuming, resulting in a complex set of size
standards that would likely be unusable. The association maintained
that adding in a geographic variable would complicate the application
of size standards for the reasons provided. For example, if applied at
place of delivery or at multiple locations of delivery, how would the
size standards differentiate between sizes of companies performing on
that task order or between subcontractors and contractors? Application
of size standards geographically would create more confusion than
opportunity, the commenter added.
A commenter representing the elevator industry believed that trying
to segment size standards geographically would lead to a host of
unintended consequences that would render the size standards impossible
to effectively implement. The commenter asked how the size standards
would be applied when a contractor is headquartered in one geographic
region (such as a state) and performs contracts in others. Another
commenter agreed with the SBA's position that varying size standards
geographically would lead to undue complexity and the resulting
confusion would render geographically based size standards unusable.
SBA Response
The statute defines a small business concern as the one which is
independently owned and operated and which is not dominant in its field
of operation (15 U.S.C. 632 (a)(1)). The statute does not exclude from
the definition those small businesses that might dominate their fields
of operations within a specific geographic area. Whether a firm is
``not dominant in its field of operation'' is made at the national
level.
The statute requires SBA to ensure that the size standard varies
from industry to industry to the extent necessary to reflect the
differing characteristics of the various industries (15 U.S.C.
632(a)(3)). However, the statute does not require SBA to vary the size
standard from geography to geography to account for geographical
differences in industrial characteristics.
If SBA were to establish size standards that would vary
geographically, SBA would need to identify a proper unit of geography.
Should it be the region, state, county, or other basis? Whatever basis
SBA were to choose, SBA likely would need to vary each of the 1,000-
plus industry-based size standards by geography. This could result in
tens or even hundreds of thousands of size standards using geography-
industry pairs. The public would then face the immense burden of
reviewing, commenting on, and complying with those size standards.
[[Page 74117]]
Another challenge with geographically varying size standards would
be determining the applicable size standard when the vendor's location
is different from the location of contract performance. Which size
standard would be applicable in determining the small business status
of the vendor? Should it be the size standard that applies to the area
where the vendor is located, or should it be the size standard
applicable to the location of contract performance? If vendor location,
firms with multiple locations would either be subject to multiple size
standards or a complex series to regulations to determine which
location sets the size standard. If location of contract performance,
firms would compete on an uneven basis because they would be subject to
different size standards.
Geographically varying size standards may inappropriately influence
entrepreneurs' decisions on selecting business location. If size
standards varied geographically, entrepreneurs would tend to be
encouraged to move from places with lower size standards to places with
higher size standards to receive the benefits of higher size standards.
This may lead to potential disparities in entrepreneurship and business
development among geographic regions. This might inadvertently suppress
economic development in already-distressed regions as firms seek
optimal locations based on regulatory compliance rather than economic
forces.
SBA determines the size standards based on special tabulations of
business data from the Economic Census, which is compiled and reported
nationally. The same level of details of Economic Census data is not
available for smaller geographical units. SBA is required to set size
standards that would exclude firms that are ``dominant in their field
of operation,'' and that criteria is set nationally. As a result, in
large part, the size standards are higher than they would be if the
Agency were to look at smaller geographic areas because very few firms
that are dominant locally are dominant nationally. Data limitations
preclude an extensive analysis of businesses within specific industries
on a geographical basis.
For the above reasons and commenter's views discussed above, SBA
will continue to establish and apply the size standards at the national
level, without considerations to geographical differences in industry
characteristics.
Are there alternative approaches that SBA should consider for
determining small business size standards?
Two comments addressed this issue. One commenter suggested that SBA
should reconsider establishing a common size standard for closely-
related NAICS codes, such as those under NAICS 5415, Computer Systems
Design and Related Services. The commenter argued that, until the most
recent revision, all 6-digit industries under NAICS 5415 had the same
size standard because those NAICS codes are used interchangeably by
agencies, resulting in confusion.
An elevator company suggested that SBA should consider irrefutable,
publicly available data provided by industry participants and industry
expertise in the context of determining the size standard for the
elevator industry. With respect to the elevator industry, the commenter
argued that elevator maintenance, repair and modernization companies
are vastly different from elevator inspection companies, and it would
be inappropriate to lump them into one category simply because they
both relate to the elevator industry. The commenter argued that
companies involved in maintenance, repair and modernization of
elevators are dramatically different from those companies involved in
inspection of elevators. Compared to the latter, the commenter noted,
the former have significant barriers to entry and very high
concentration of large companies that dominate the market. Elevator
inspection companies, on the other hand, have very low barriers to
entry, do not require licensed mechanics, and have dramatically lower
revenue per employee, and higher competition within the industry, the
commenter added. The commenter contended that equipment needed to
perform elevator inspection contracts is less costly than that required
to perform maintenance contracts.
SBA Response
The National Defense Authorization Act of Fiscal Year 2013 (NDAA
2013) (Pub. L. 112-239, section 1661, Jan. 2, 2013) amended the Small
Business Act to prohibit SBA from limiting the number of size standards
and to require SBA to assign specific size standards for each NAICS
industry. This limits the SBA's ability to group NAICS industries to
establish a common size standard. Additionally, according to section
3(a)(7) of the Small Business Act, SBA may establish or approve a
single size standard for a grouping of 4-digit NAICS codes only the
Agency makes publicly available, not later than the date on which such
size standard is established or approved, a justification demonstrating
that such size standard is appropriate for each individual industry
classification included in the grouping. However, the results from the
second 5-year review of the size standards under the Jobs Act (85 FR
72484; November 13, 2020) did not support the same size standard for
all industries in NAICS 5415. For example, calculated size standards
for those industries varied from $20.5 million for NAICS 541511, Custom
Computer Programming Services, to $32.5 million for NAICS 541513,
Computer Facilities Management Services.
With respect to the comment regarding the size standard for the
elevator industry, SBA encourages the commenter to submit this
information as comment to the proposed rule reviewing the monetary-
based size standards the Agency will issue as part of the forthcoming
third 5-year review of size standards under the Jobs Act. As indicated
elsewhere in this document, any concerns regarding the size standard(s)
for a specific industry or group of industries are beyond the scope of
the Methodology.
How have SBA's latest size standards revisions impacted competition
in general and within a specific industry?
One company operating in the elevator industry noted that the
elevator maintenance-related industry, usually classified under NAICS
238290, Other Building Equipment Contractors, has a revenue-based size
standard of $22 million, whereas elevator manufacturing industry, NAICS
333921, Elevator and Moving Stairway Manufacturing, has a size standard
of 1,000 employees. The commenter argued that the $22 million revenue
size standard is a significant barrier to growth of elevator
maintenance companies. The SBA current size standards have
unintentional consequences for the elevator industry in terms of
limiting competition, the commenter noted. The commenter argued that
the current size standards for elevator related work have allowed
multi-national, multi-billion elevator companies to dominate the
Federal market. Elevator maintenance contracts are performed by highly
trained and compensated personnel using expensive and sophisticated
equipment, which leads to higher contract prices, causing elevator
maintenance companies to perform fewer contracts before they exceed the
revenue-based size standard, the commenter added. Thus, the commenter
recommended that SBA should consider using an employee-based size
standard of 1,000 employees for the elevator maintenance industry as
revenue is not the best indicator of business size.
[[Page 74118]]
SBA Response
With respect to the comment regarding the size standard for the
elevator industry, SBA encourages the commenter to submit this
information as comment to the proposed rule reviewing the monetary-
based size standards the Agency will issue as part of the forthcoming
third 5-year review of size standards. As indicated elsewhere in this
document, any concerns regarding the size standard(s) for a specific
industry or group of industries are beyond the scope of the
Methodology. Moreover, for industries with significant subcontracting,
such as construction-related industries, SBA uses receipts, not
employees, as a measure of business size for size standards purposes.
Are there alternative or additional factors or data sources that
SBA should consider when establishing, reviewing, or revising size
standards?
One commenter supported the omission from the Revised Methodology
of the effects of industry dynamics, such as entry and exit of firms,
mergers and acquisitions, and changes in market structure, on the size
standards because it is impractical and unnecessary to account for
these factors in the Methodology. The commenter maintained that SBA
reviews and adjusts the size standards periodically, at least once
every five years, to reflect the changes in the industry
characteristics and market conditions. Therefore, the size standards
are not static or fixed, but dynamic and flexible, and they can
accommodate the variations and fluctuations in the industry dynamics
over time, the commenter noted.
Another commenter maintained that one factor that SBA should
consider when establishing, reviewing, or revising its size standards
is the impact of a reduction in size standards on the viability of
small businesses. The commenter proposed making a reduced size standard
become effective 180 days after publication of the final rule in the
Federal Register.
A comment from the elevator industry believed SBA should consider
non-biased, irrefutable, and publicly available information provided to
it by industry participants to supplement SBA determination of the size
standard within a given industry. The commenter maintained that, while
the Economic Census data provides a directionally accurate snapshot of
certain industries, it is not a 100% accurate representation of the
underlying facts related to companies' sizes within that industry.
Additionally, certain industries are not clearly represented within the
NAICS manual at all, namely, the elevator industry, the commenter
noted. The commenter recommended that SBA should create a new NAICS
code for the elevator industry and establish a size standard of 1,000
employees, the same size standard that applies to the elevator
manufacturing industry.
SBA Response
The commenter's statement that the Methodology omits the factors
such as entry and exit of firms and mergers and acquisitions is not
quite correct. As a proxy of startup costs and entry barriers, SBA
evaluates the average assets size as one of the four industry factors
when establishing, reviewing, and modifying size standards. Similarly,
mergers and acquisitions may lead to affiliation, thereby affecting the
calculation of business size for size standards purposes. As part of
the regulatory impact analysis of the proposed and final rules, SBA is
required to include a statement describing the impact of size standards
changes (including decreases) on small businesses in terms of access to
small business assistance. Similarly, as part of its decision on
whether to revise a size standard, SBA examines, as a secondary factor,
impacts of size standards changes on small business access to and
eligibility for Federal assistance. In most cases, SBA allows the final
rules to become effective 30 days from their publication in the Federal
Register. Thus, assuming that the size standards revisions include both
increases and decreases, it would be impractical to make a higher size
standard effective 30 days from the date of publication of the final
rule in the Federal Register and delay the effective date for a lower
size standard to 180 days. Delaying the effective date for higher size
standards to 180 days would prevent some larger small businesses from
realizing the benefits of size standards increases. SBA always
encourages industry participants to provide, as part of their comment
to the proposed rules, the alternative industry data or facts
pertaining to a specific industry's size standard. SBA will consider
such data or facts very thoroughly and may even adjust the proposed
size standard as a result.
Does SBA's current approach to establishing or modifying small
business size standards make sense in the current economic environment?
Four comments addressed this issue. One commenter agreed that the
SBA's current approach to establishing or modifying small business size
standards makes sense in the current economic environment and supported
the SBA's policy of not lowering size standards during periods of
fluctuating economic conditions.
Another commenter, a woman-owned small business (WOSB), operating
under NAICS 236220, Commercial and Industrial Building Construction,
expressed appreciation for revisions to size standards in response to
the fluctuations in economic conditions due to the COVID-19 pandemic
and believed that the Revised Methodology will provide further
refinements to the considerations of industry factors and Federal
market conditions.
An industry association asserted that the current approach is the
most practical approach at this time. Establishing a different approach
to small business size standards would be a complex challenge that
should be undertaken with clear objectives and with sufficient time to
conduct analyses and assess the potential results of alternative
approaches, the commenter added.
A comment from the elevator company felt that the SBA's current
approach does a very good job of accounting for inflation and other
macroeconomic environment affecting small businesses. The periodic size
standard increases to account for inflation have been handled
expeditiously and been beneficial to all small businesses, the
commenter added. However, the commenter felt the SBA should consider
irrefutable publicly available information from industry participants
relating to any given industry. SBA should consider such information to
better support its effort to establish a correct size standard for an
industry in question.
SBA Response
SBA agrees with the commenters that the Revised Methodology makes
sense in the current economic environment. SBA will continue to
consider the prevailing economic environment when deciding on whether
the size standards should be revised or retained at the current levels.
SBA is committed to complete the quinquennial reviews of size standards
under the Jobs Act in a timely manner to ensure that size standards
reflect current market conditions. Similarly, SBA is also committed to
periodically assess the impacts of inflation on monetary-based size
standards and make necessary adjustments.
3. Other Issues
Provide detailed data and calculated size standards.
SBA received three comments demanding that SBA provide the
[[Page 74119]]
underlying data involved in the calculations for the Methodology and
calculated size standards under the Revised Methodology. One commenter
asked SBA to provide a detailed table showing size standards under the
current Methodology and those under the Revised Methodology to be
better able to provide comments to proposed changes to the Methodology.
Another commenter asked if it is possible for SBA to provide access
to the data used in the calculations in the white paper. Without this
data it is impossible to make an assessment if the Methodology
determines fair and reasonable size standards, the commenter argued.
The problem with the Methodology is that it appears to use data that is
not available to the public, the commenter added. Without access to
this data, it is difficult to compare the results of the Methodology,
and perhaps have the ability to look for and point out problems or
areas for improvement in the Methodology.
Another commenter requested that SBA provide a detailed analysis of
how proposed changes, especially the adoption of the disparity ratio
approach and the utilization of the FPDS-NG and SAM data, will affect
small businesses across various industries, especially an assessment of
potential impacts on small business participation in Federal
contracting.
SBA Response
SBA has provided a summary of calculated industry size standards
under the 2019 Methodology and the 2024 Revised Methodology in Table 15
under the Impacts of Changes Methodology Section of the Revised
Methodology. Of 392 industries averaging $20 million or more in Federal
contracting annually during fiscal years 2020-2022, based on the latest
data available to SBA when the Revised Methodology was prepared, 159 or
40.5% of industries would see an increase to size standards under the
2019 Methodology, as compared to 169 or 43.1% of industries that would
see an increase to size standards under the 2024 Revised Methodology.
Similarly, 169 or 43.1% of industries under the 2019 Methodology and
167 or 42.6% of industries under the 2024 Revised Methodology would see
a decrease to size standards. Sixty-four or 16.3% of industries under
the 2019 Methodology and 56 or 14.3% of industries under the 2024
Revised Methodology would see no change to size standards. Thus,
comparing the results from the 2019 Methodology and the 2024
Methodology, slightly more industries would see an increase to size
standards under the 2024 Methodology and slightly more industries would
see no change to size standards under the 2019 Methodology. Thus,
overall, the changes to size standards as the result of the changes in
the Methodology would have a very minimal impact on number of
businesses that qualify as small. Excluding Sectors 42 and 44-45,
97.77% of businesses would qualify as small under the calculated size
standards under both Methodologies. That figure is 97.78% under the
current size standards.
Inconsistency between general size standards and exceptions.
One commenter, referring to the size standards for the general
NAICS 237990, Other Heavy and Civil Engineering Construction, and the
Dredging subindustry (or ``exception'') under that industry, stated
that there exists inconsistency between size standards for general
NAICS industries and size standards at the subindustry levels or
``exceptions,'' especially when the size standard for a general NAICS
industry is lower than the size standard for a subindustry or exception
within that industry. The commenter contended that this could create
confusion or unfairness for businesses that operate in both the NAICS
industry and the subindustry or exception, or that compete with
businesses that do, by allowing them to qualify as small under the
exception but not small under the general NAICS industry. It may also
affect the accuracy and consistency of the data and statistics that SBA
and other agencies collect and report on the small business sector, the
commenter argued. The commenter suggested that SBA provide a clear
rationale and a consistent rule for handling the cases of inconsistency
between the size standards for general NAICS industries and their
corresponding subindustry or exception size standards.
SBA Response
The Small Business Act requires that size standards vary from
industry to industry to reflect differing characteristics among the
various industries. Thus, it is not uncommon for a firm operating in
multiple industries to be small in some industries and other than small
in others. That also applies to size standards for the general NAICS
industry size standards and the size standards at the subindustry
levels or exceptions. Except for the Dredging exception that has a
lower size standard than that for the general NAICS 237990, usually
size standards at the subindustry levels (``exceptions'') are larger
than those for the general industries. Thus, it is not unusual for
companies operating both under general NAICS industry and subindustry
levels to be small under the exception size standards and other than
small under the general NAICS size standards. It is logical for a firm
to be other than small under the Dredging exception and to be small
under the general NAICS 237990 because the characteristics of firms of
that specific sublevel may be different from the characteristics of the
firms that constitute the general level, of which there may be a much
greater number. The subindustry categories are used solely for Federal
procurement purposes and are not used by the Government to collect
industry statistics.
Analytical Equations
One commenter stated that while the equations that SBA uses to
calculate size standards, such as simple average, weighted average,
linear transformation, and linear interpolation are simple and easy to
implement, they may not capture the complexity and diversity of the
industries and the market conditions.
1. Weighted average: The commenter argued that by assigning higher
weights to larger firms, a weighted average may provide a more accurate
and representative measure of the industry characteristics than a
simple average, which treats all data equally, but it may also
introduce some problems, such as data availability and reliability, and
it may make the calculation and communication of the size standards
more complex and less transparent. Without providing any facts and
analysis, the commenter argued that the weighted averaged may not be
consistent with the legislative intent and the SBA's statutory mandate
to consider the industry characteristics of all businesses in an
industry.
SBA Response
SBA does not face any problem of data availability and reliability
in calculating the weighted average firm size. The Economic Census
special tabulation that SBA receives from the U.S. Census Bureau to
examine industry structure contains the results for weighted average,
along with other measures (such as simple average firm size, 4-firm
concentration ratio, Gini coefficient, etc.), calculated based on
actual firm-specific data. SBA used the weighted average firm size as
one of the factors to evaluate industry structure in both the first and
second five-year reviews of size standards under the Jobs Act but did
not receive any adverse comments or complaints from the public or
industry participants citing its complexity or lack of transparency.
Therefore, SBA will continue using the
[[Page 74120]]
weighted average firm size as one of the factors to evaluate industry
structure.
2. Linear transformation: The commenter suggested replacing a
linear transformation of industry characteristics with a logarithmic
transformation to reduce the skewness and outliers in the data and to
improve the normality and homoscedasticity of the distribution.
However, a logarithmic transformation may also complicate the
calculation and communication of the size standards, and it may not be
simpler and more transparent than a linear transformation, the
commenter argued. Furthermore, the commenter added that a logarithmic
transformation may affect the clarity and transparency of the size
standards, as it may make the size standards less intuitive and more
difficult to understand and verify by businesses and Federal agencies
that use them. Therefore, the commenter recommended weighing the
benefits and drawbacks of using a logarithmic transformation and
compare it with the current method of using a linear transformation,
which is simpler, transparent, consistent, and stable.
SBA Response
As maintained elsewhere, the special tabulation of the quinquennial
Economic Census that SBA receives from the U.S. Census Bureau contains
various measures of industry characteristics (e.g., simple average firm
size, weighted average firm size, four-firm ratio, and Gini
coefficient, etc.) that SBA evaluates in analyzing size standards. The
Census Bureau calculates these measures from the original, raw firm-
specific data without any transformation of such data. SBA does no
transformation of the results provided by the Census Bureau. Thus, the
potential problems with linear transformation that the commenter
identified are nonissues. Moreover, as noted by the commenter, the
logarithmic transformation has several drawbacks, including that it is
complex, less transparent, difficult to understand, and unstable.
3. Linear interpolation: The commenter suggested using a nonlinear
interpolation, such as a spline or a polynomial, instead of a lineal
interpolation to capture the potentially nonlinear relationships
between industry characteristics and size standards. The commenter
argued that an industry with a high degree of competition or innovation
may have a more complex or dynamic relationship between the industry
characteristics and the size standards, which may not be adequately
captured by a linear interpolation. However, the commenter noted that
using a spline or a polynomial interpolation may introduce more
uncertainty and variability in the results, and it may not be more
stable and consistent than a linear interpolation. Additionally, a
spline or a polynomial interpolation may impair the simplicity and
clarity of the size standards, as it may make the calculation and
communication of the size standards more sophisticated and less
straightforward, the commenter noted.
SBA Response
The commenter recommended using a spline or nonlinear
interpolation, instead of linear interpolation, to capture the
potentially nonlinear relationships between industry factors and size
standards. However, it contended that using a spline or a polynomial
interpolation may introduce more uncertainty, complexity,
inconsistency, variability, and instability in the results. We have
found a linear interpolation to produce reasonable results that are
more intuitive, more straightforward, and easier to explain to the
stakeholders. Moreover, generally there is a positive correlation
between industry factors and size standards.
Use of gross domestic product (GDP) price index.
One commenter supported the use of the GDP price index as the
measure of inflation because it captures the overall changes in the
prices of goods and services produced in the economy, which affect the
costs and revenues of businesses in all industries. The commenter added
that alternative measures of inflation, such as the Consumer Price
Index (CPI) or the Producer Price Index (PPI), may not be suitable
because they focus on specific segments of the economy, such as
consumers or producers, and may not reflect the diversity and
complexity of the business activities and transactions.
SBA Response
As part of the 2014 inflation adjustment (79 FR 33647; June 12,
2014), SBA reviewed various measures of inflation published by the
Federal Government, including the GDP price index, the CPI, the PPI,
the personal consumption expenditures (PCE) price index, and the unit
labor cost for their appropriateness to use for adjusting monetary-
based size standard for inflation. Based on that review, SBA determined
that, being the most comprehensive measure of price movements for the
overall economy, the GDP price index is the most appropriate measure of
inflation for purposes of adjusting size standards for inflation.
Historically, SBA has used the GDP price index for adjusting size
standards for inflation.
Inclusion of the 4-firm ratio.
One commenter stated that the application of the 4-firm
concentration ratio to all industries is reasonable because it is a
simple and widely used indicator of market structure and competition.
It measures the share of the total industry revenue that is earned by
the four largest firms in the industry, and it ranges from 0 to 100,
where higher values indicate higher concentration and lower values
indicate lower concentration. The 4-firm concentration ratio is also
consistent with the SBA's statutory mandate to consider the degree of
competition among businesses in an industry when setting the size
standards.
SBA Response
Using the 4-firm concentration ratio SBA compares the degree of
concentration within an industry to the degree of concentration of the
other industries with the same measure of size standards. The 4-firm
concentration ratio is widely used as a measure of industry
concentration. Prior to the 2019 Methodology, SBA used the 4-firm
concentration ratio only for the industries where its value was 40% or
higher. Starting from the 2019 Methodology, SBA started using the 4-
firm concentration ratio for all industries regardless of its
magnitude. If a significantly higher share of economic activity within
an industry is concentrated among the four largest firms compared to
most other industries, all else being equal, SBA would set a size
standard that is relatively higher than for most other industries.
Conversely, if the market share of the four largest firms in an
industry is appreciably lower than the similar share for most other
industries, the industry will be assigned a size standard that is lower
than those for most other industries.
Decreases to size standards.
Citing the information provided on page 56 of the Revised
Methodology that under the disparity ratio approach, 167 or 42.6% of
industries averaging $20 million or more in Federal contracting would
see a decrease on size standards, one commenter asked SBA to clarify
whether it intends to decrease size standards for some industries based
on proposed changes in the Methodology.
SBA Response
The question of whether SBA would increase, decrease, or retain the
size standards is beyond the scope of the
[[Page 74121]]
Methodology. The Methodology merely provides the framework for
reviewing and calculating new size standards, but it does not drive
SBA's determination on whether to revise or retain size standards. That
determination will be made through rulemakings with the considerations
of the results from the latest available industry and Federal
procurement data, comments to the proposed changes in size standards,
impacts of proposed size standards changes on small business access to
Federal small business assistance, the prevailing economic conditions
and their impacts on small businesses, and Administration's and SBA's
policies and programs.
Impact of the revised methodology.
One commenter asked if SBA has calculated the impacts of its
proposed changes in the Revised Methodology on the size standards for
each of NAICS 6-digit level industries? If so, what is the projected
impact on NAICS 541330, Exception 1, Military and Aerospace Equipment
and Military Weapons, the commenter asked.
SBA Response
As discussed elsewhere in this document, SBA provided in Table 13
of the Revised Methodology a summary of impacts of proposed revisions
to the Methodology on the size standards for 6-digit NAICS industries
averaging $20 million or more in Federal contracting. SBA did not
provide that information for the specific NAICS industries or
subindustries because that would change when SBA updates the industry
and Federal procurement data. The information on the changes in the
size standard for a specific NAICS industry or subindustry would be
provided in the proposed rules that Agency will publish in the near
future as part of the third 5-year review of size standards under the
Jobs Act.
Calculation of receipts under subcontracting.
One commenter noted that to perform complex Government contracts
successfully, small business prime contractors must frequently
subcontract significant portions of work to large businesses or other
small businesses. The commenter argued that under the employee-based
size standards, the number of subcontractor employees working on a
contract is not counted as part of the small business prime
contractor's employee total. However, under receipts-based size
standards, the subcontractor's share of contract receipts is included
in the small business prime contractor's total annual receipts despite
the facts that these receipts, other than administrative costs, are not
part of the prime contractor's annual revenue, the commenter added. Has
the SBA considered making the two standards consistent with each other
by excluding subcontractor annual receipts from a small business prime
contractor's annual receipts total, the commenter asked.
SBA Response
According to 13 CFR 121.104, receipts for size standards purposes
means all revenue in whatever form received or accrued from whatever
source, including from the sales of products or services, interest,
dividends, rents, royalties, fees, or commissions, reduced by returns
and allowances. Regarding the comment that SBA should modify its
definition of receipts to allow for the exclusion of amounts paid to
third-party subcontractors (usually referred to as ``pass-throughs''),
SBA disagrees. SBA does not allow for the exclusion of ``pass-
throughs'' because they are part of the usual and customary costs of
doing business. Accordingly, SBA considers ``pass-throughs,'' and other
similar factors, as secondary factors when it establishes small
business size standards. Specifically, the Economic Census data that
SBA uses in its size standards analysis includes all revenues received
by companies, including the values of their subcontracts. If the
``pass-throughs'' were allowed to be excluded from the calculation of
receipts, SBA would also have to revise its methodology to establish a
lower size standard to reflect the size of the industry without them.
Thus, SBA does not believe it is reasonable to exclude these costs from
the calculation of receipts.
Calculation of receipts for joint ventures.
A commenter stated that to successfully bid on and perform complex
Government contracts small businesses must occasionally enter into
joint venture agreements with other small businesses in the same
industry. The current regulations and proposed modifications do not
adequately address how the division of contract receipts among joint
ventures should be used to calculate an individual company's annual
receipts for purposes of small business size standards calculations,
the commenter argued. The commenter noted that the current regulations
also do not adequately address how receipts allocated to subcontractors
should be apportioned in calculating the annual receipts of the small
business joint ventures. Has the SBA considered amending its size
standards methodology and regulations to address allocation of annual
receipts, the commenter asked.
SBA Response
For size standards calculations, a concern must include in its
receipts its proportionate share of joint venture receipts.
Proportionate receipts do not include proceeds from transactions
between the concern and its joint ventures (e.g., subcontracts from a
joint venture entity to joint venture partners) already accounted for
in the concern's tax return. In determining the number of employees, a
concern must include in its total number of employees its proportionate
share of individuals employed by the joint venture. For the calculation
of receipts, the appropriate proportionate share is the same percentage
of receipts or employees as the joint venture partner's percentage
share of the work performed by the joint venture. For a populated joint
venture (where work is performed by the joint venture entity itself and
not by the individual joint venture partners) the appropriate share is
the same percentage as the joint venture partner's percentage ownership
share in the joint venture. For the calculation of employees, the
appropriate share is the same percentage of employees as the joint
venture partner's percentage ownership share in the joint venture,
after first subtracting any joint venture employee already accounted
for in one of the partner's employee counts. See 13 CFR 121.103(h)(3).
4. General and Industry Specific Size Standards
General size standards.
Without providing any facts or analysis, a comment from an advocacy
organization for WOSBs argued that SBA's current industry size
standards do not incentivize small business growth. The commenter
maintained that under the current size standards, small businesses face
risk of losing their small business status if their revenue exceeds a
certain threshold due to a single high revenue generating contract. The
commenter cited a testimony from a WOSB to the February 6, 2023, House
Small Business Committee Hearing on size standards, arguing that her
business has been teetering on the edge of its small business size
standard, which puts her in a difficult position as she plans the
future of her business. She testified to the Committee that if she lost
her small business size status, she would have to lay off at least 30%
of her staff of 95 people, the commenter added. The commenter contended
that businesses that lose their small business status may lose
opportunities to win
[[Page 74122]]
contracts, given that midsized businesses are set up to compete against
much larger companies with more resources. Small business owners do not
have many options if they are at risk of losing their status, the
comment noted. The commenter stated that they are forced to reduce or
cap their revenue, sell off part of their business, or team up with
another small firm to keep their status. In case of teaming up with
another firm, small businesses only retain 49% of contracts they
earned, the commenter argued.
SBA Response
While SBA recognizes challenges the larger small businesses close
to exceeding size standards and mid-size firms that have already
exceeded the size standards face in competing in the Federal market,
deliberations of such issues are beyond the scope of the Revised
Methodology. SBA notes that there will always be some businesses in the
brink of exceeding the size standards regardless how high the size
standards are. To address the concerns that midsized businesses face in
the Federal market, SBA recently implemented the Congressional
enactments to increase the averaging period for calculating annual
receipts from 3 years to 5 years (Pub. L. 116-283) and averaging period
for calculating the number of employees from 12 months to 24 months
(Pub. L. 115-324). As advised elsewhere in this document, the
commenters are advised to submit any concerns regarding the size
standards for specific size standards when SBA issues for comment the
proposed rule covering their industries.
Industry-specific size standards.
NAICS 236220, Commercial and Institutional Building Construction.
Citing the lingering economic impacts from the COVID-19 pandemic
and high post-pandemic inflation, a commenter proposed increasing the
size standard for NAICS 236220, from the current $45 million in average
receipts to $50 million. The commenter did not provide any industry
analysis and facts supporting its proposal.
SBA Response
The latest industry and Federal contracting data that SBA used to
prepare the proposed rule to review the size standards for industries
in the construction sector (NAICS 23) under the Jobs Act supported a
size standard of $25.5 million size standard for NAICS 236220 (85 FR
62239; October 2, 2020). Because of the SBA's policy of not lowering
any size standard in light of the impacts of the COVID-19 pandemic on
small businesses and the overall economy, in the final rule (87 FR
18607; March 31, 2022), SBA adopted the existing $39.5 million existing
size standard, which was later increased to $45 million as part of
inflationary adjustment in 2022 (87 FR 69118; November 17, 2022). As
advised elsewhere in this document, the commenters are advised to
submit any concerns regarding the size standards for specific
industries when SBA issues for comment the proposed rule covering their
industries.
NAICS 541330, Engineering Services.
Citing reasons such as the use of the qualifications-based
selection process under the Brooks Act, which is said to be dominated
by the largest firms, the high degree of concentration of the Federal
market share among the top 10 largest companies, and the Federal
Government's increasing reliance on limited competition contract
vehicles (such as IDIQs and GWACs) to procure engineering services, the
commenter recommended increasing the size standards for NAICS 541330 to
$39.5 million in average annual revenue. The commenter attached its
comment it submitted to the proposed rule published as part of the
second 5-year review of size standards under the Jobs Act and its March
27, 2021, letter to the SBA's Administrator urging the Agency to
establish a $39.5 million size standard for NAICS 541330.
SBA Response
As part of the second 5-year review of size standards under the
Jobs Act, based on the latest available industry and Federal
procurement data, SBA had proposed increasing the size standard for
NAICS 541330 from $16.5 million to $22.5 million as part of the second
5-year review of size standards (85 FR 72584; November 13, 2020). Based
on the considerations of public comments and industry data, SBA adopted
$22.5 million in the final rule (87 FR 18665; March 31, 2022), which
SBA increased to $25.5 million as part of adjustment of monetary based
size standards for inflation in 2022 (87 FR 69118; November 17, 2022).
The concerns regarding the size standards for specific industries are
beyond the scope of the Revised Methodology. The Methodology merely
provides an analytical framework for reviewing existing and calculating
new size standards. SBA's actual decisions to change or modify size
standards are implemented through rulemakings. SBA encourages the
commenters to submit their concerns regarding the size standards for
specific industries, including any relevant data and analysis, by
commenting on the forthcoming proposed rules reviewing size standards
for those industries.
NAICS 336611, Ship Building and Repairing.
SBA received a comment from a small business concern operating
under NAICS 336611 that currently has a size standard for 1,300
employees. The commenter stated that the ship building and repairing
market is dominated by very large companies with tens of thousands of
employees that receive funds from the Federal Government, enabling them
to improve their facilities and equipment and to make ship building
more efficient. Large businesses leverage these same efficiencies when
competing against small businesses, creating an unfair competitive
advantage, the commenter contended. The commenter asserted that with
the size standard of 1,300 employees, the industry is currently very
competitive. Large businesses constantly lobby the Federal Government
to increase their market share at the expense of the market share of
small businesses that lack resources and constituent base for lobbying,
the commenter added. A business with 1,300 employees would have revenue
in the range of $300 million, which is certainly not a small business
in the ship repair industry, the commenter argued. The commenter, based
on above factors, urged that SBA should not increase the size standard
for NAICS 336611 beyond 1,300 employees, as doing so would enable large
businesses to compete against small businesses as small businesses.
SBA Response
The latest industry and Federal procurement data that was available
for SBA to review the size standard for Manufacturing industries as
part of the second 5-year review of size standards under the Jobs Act
supported a size standard of 1,300 employees for NAICS 336611, an
increase from 1,250 employees (87 FR 24752; April 26, 2022).
Accordingly, in the final rule, SBA adopted 1,300 employees as the size
standard for NAICS 336611 (88 FR 9970; February 15, 2023). As stated
elsewhere, the concerns regarding the size standards for specific
industries are beyond the scope of the Revised Methodology. The
Methodology merely provides an analytical framework for reviewing
existing and calculating new size standards. SBA's actual decisions to
change or modify size standards are implemented through rulemakings.
SBA encourages the commenters to submit their concerns regarding the
size standards for specific industries, including any relevant data and
[[Page 74123]]
analysis, by commenting on the forthcoming proposed rules reviewing
size standards for their industries.
Environmental remediation services (ERS) exception to NAICS 562910,
Remediation Services.
A commenter stated that the ERS exception, first established in
1994 (59 FR 47236; September 15, 1994), is fundamentally different from
most other exceptions. The commenter contended that all exceptions--
except the ERS exception and the exceptions to Research and Development
(R&D) NAICS codes--are derived from subsets of the primary NAICS
industry from which the subindustry or exception originates. While the
size standards for exceptions to R&D NAICS codes are derived by
aligning the corresponding manufacturing size standards, the ERS
exception, unlike all other exceptions, is not derived from the subset
of the primary NAICS 562910, the commenter added. The commenter argued
that such uniqueness of the ERS exception comes from the original
formulation of the ERS industry, as reflected in Footnote 14 of the
SBA's table of size standards which recognizes that no single industry
dominates the scope of the ERS work. The commenter contended that the
ERS exception is a superindustry instead of a subindustry. Some firms
competing in ERS may designate the base NAICS 562910 as their primary
industry, but others may not, the commenter noted.
The commenter expressed concerns about the SBA's approach to
creating the ERS industry by trimming the largest ERS awardees whose
primary activity is unrelated to ERS. The commenter expressed the
opinion that excluding such firms is arbitrary and nonsensical within
the meaning of Footnote 14. The commenter proposed to identity a
primary industry for each ERS awardee and to exclude those which do not
align with industries that SBA used to formulate the ERS industry
originally. If this proposed solution is not acceptable to SBA and if
SBA still decides to remove large companies form the dataset in future
rulemakings, the commenter recommended that SBA provide a list of the
specific firms removed from the dataset. This approach would provide
greater transparency and would allow industry participants to comment
on whether the removed companies were or were not significant players
in the ERS market, the commenter argued. The commenter further argued
that removing large companies, unknown to the public, from SBA's
dataset, without providing opportunity for industry feedback on the
propriety of specific exclusions, introduces opacity and arbitrariness
that ultimately undermines the credibility of SBA's Methodology. The
industry cannot provide meaningful comment as to whether an excluded
firm is an ERS competitor if the SBA is not transparent and does not
identify the excluded firms, the commenter argued.
The commenter argued that large competitors in the ERS industry
have a serious advantage over smaller businesses in terms of winning
and executing work, even where only a small portion of their total
revenue comes from ERS work. Large firms enjoy economies of scale that
would give them a tremendous competitive advantage over a small
business making roughly similar revenue. The commenter explained that
many ERS awards are qualifications based, meaning that the company must
demonstrate it has a superior performance history and workforce when
considering the qualifications sought in the request for proposal. A
large company with a more diverse performance history can leverage the
relevant qualifications to win work.
The commenter maintained that to the extent competitions are
instead based on price criteria, a large business performing a
comparatively small amount of ERS work also has a disproportionate
advantage over smaller companies. The commenter argued that a large
company with a comparatively small ERS portfolio can spread the same
ERS workload across a much larger workforce, using a more favorable
labor mix, achieving greater labor utilization, and driving down
indirect costs. These advantages have a direct impact on pricing, the
commenter noted. Moreover, the large business can take advantage of
greater corporate resources to hire, train, and deploy labor, further
disadvantaging small businesses who must consider the total headcount
impact of hiring to perform management and overhead tasks, the
commenter added.
Excluding the largest businesses from the sample will have a
deleterious effect on the viability of small businesses in the ERS
industry, the commenter stated. The commented noted that SBA's size
standards provide small businesses a protected marketplace in which to
grow and prepare for future open competition. However, setting size
standards at an artificially low threshold prematurely thrusts
successful ERS small businesses into the same marketplace occupied by
their largest competitors. This will cause graduating ERS small
businesses to suffer unequal and inferior protection when compared to
other graduating small businesses. This outcome would appear to be
inconsistent with the statutory goal of the SBA to grow small
businesses into the American marketplace.
SBA Response
SBA does not agree with the commenter that SBA has kept the size
standard for the ERS exception artificially low. Between 2016 and 2023,
the ERS size standard has doubled to 1,000 employees. Despite the
majority of comments opposing any increase to the ERS size standard, in
2016, SBA increased it from 500 employees to 750 employees, as part of
the first 5-year review of size standards under the Jobs Act (81 FR
4436; January 26, 2016). Again, despite the majority of comments
opposing any increase to the ERS size standard, in 2023, SBA increased
the ERS size standard from 750 employees to 1,000 employees, as part of
the second 5-year review of size standards (88 FR 9970; February 15,
2023).
Without trimming the largest companies for which the ERS contract
awards account for a minimal share of their total revenues, SBA is
concerned that the data might result in a very high size standard that
might hurt smaller ERS companies that need Federal assistance the most.
Just as graduating midsized companies have a hard time competing on
unrestricted Federal contracts with large companies with vast resources
and an extensive performance history, smaller small ERS firms also face
a competitive disadvantage in competing with larger, more experienced
small businesses for set-aside Federal contracts.
As stated elsewhere, the industry data in the quinquennial Economic
Census tabulations that SBA receives from the Census Bureau are limited
to the 6-digit NAICS industry. Thus, the industry data in the special
tabulation does not allow for the evaluation of the size standards at
the subindustry levels or exceptions. Accordingly, SBA utilizes the
FPDS-NG and SAM data to calculate industry factors at the subindustry
levels. The results from the FPDS-NG/SAM data are then compared with
industry benchmarks (such as 20th percentile and 80th percentile values
of industry factors) from the Economic Census tabulation to compute the
new size standards for the exceptions. In the Economic Census
tabulation, the industry data are tallied by a primary NAICS industry.
Thus, to make the FPDS-NG/SAM results consistent with the results from
the Economic Census, SBA trims the firms, from both ends of the
distribution, for which a specific exception under review is not their
primary industry. Going forward, in the Revised Methodology, SBA will
base the
[[Page 74124]]
20th percentile and 80th percentile values of industry factors for the
exceptions also on the FPDS-NG and SAM data, thereby largely reducing
the need of trimming firms for which a particular exception in question
is not their primary industry. If the trimming is still warranted, SBA
will try to be transparent regarding the firms being trimmed while
protecting their privacy.
Recognizing that, by definition, the ERS exception includes
activities from multiple industries, a new footnote (Footnote 54) has
been added to the Revised Methodology, stating that to evaluate the ERS
size standard SBA will identify identify firms receiving contracts in
the various NAICS industries under the PSCs that correspond to the ERS
exception.
Elevator size standard.
A commenter argued that there is no NAICS code that specifically
applies to the elevator industry. In absence of a separate NAICS code
for the elevator industry, the commenter provided a list of NAICS codes
that Federal contracting officers use to classify elevator maintenance,
repair, and modernization contracts:
<bullet> NAICS 811310--Commercial and Industrial Machinery & Equipment
(size standard of $12 million)
<bullet> NAICS 238290--Other Building Equipment Contractors ($22
million)
<bullet> NAICS 236220--Commercial and Institutional Building
Construction ($45 million)
<bullet> NAICS 561210--Facility Support Services ($47 million)
<bullet> NAICS 333921--Elevator and Moving Stairway Manufacturing
(1,000 employees)
For an elevator modernization/construction contract, the commenter
contended that contracting officers typically use either NAICS 238290
or NAICS 236220. Under this scenario, an elevator company can be
awarded a modernization project as a small business under NAICS 236220
but would be unable to bid, as a small business, on the maintenance
contract under NAICS 238290 because they are considered too ``large''
under that NAICS industry. The commenter argued that the fact that all
elevator companies perform both modernization and maintenance tasks,
but are deemed small enough to perform one, but too large to perform
the other, is an oversight that should be corrected.
The commenter maintained that every elevator company in the country
performs elevator maintenance, repair, modernization, and construction,
and recommended that SBA lump all these activities together and create
a unique NAICS code for the elevator industry and establish an
employee-based size standard of 1,000 employees. With an elevator-
specific NAICS code, there would be no guesswork by contracting
officers in choosing an appropriate NAICS code for elevator
maintenance, repair, modernization and construction work, the commenter
noted. Due to the lack of a single NAICS code representing the elevator
industry, the commenter noted that elevator-related contracts
(maintenance and modernization) are generally awarded to general
contractors, who subsequently subcontract that work out to multi-
national, multi-billion, foreign-owned conglomerates operating in the
elevator industry. As much as 70-80% of contract value is performed by
those conglomerates, the commenter argued.
The commenter proposed that SBA consider, in addition to the
Economic Census data, publicly available alternative industry data and
industry expertise in determining the size standard for the elevator
industry. Based on the industry data the commenter has access to, the
commenter provided estimates of various industry factors that SBA
evaluates in establishing and reviewing size standards, including the
4-firm concentration ratio (70%) and Gini coefficient (0.90), arguing
that these factors support a much higher size standard for the elevator
industry. They also noted that generally the elevator industry has
significant barriers to entry and higher average firm size due to
industry dominance by the largest four firms. The companies that exceed
the current size standard of the elevator-related industries cannot
compete under full and open competition against the largest competitors
that are more than 200 times larger than a small elevator company, the
commenter argued.
SBA Response
As stated elsewhere in this document, the Small Business Act
requires the size standards to vary from industry to industry to the
extent necessary to reflect the differing characteristics among the
various industries. When a company operates in closely related multiple
industries (such as NAICS 236220 and NAICS 239290), it is not uncommon
for it to be considered small in some industries and other than small
(``large'') in others. A good example is a company operating both in
NAICS 541310, Architectural Services, and in NAICS 541330, Engineering
Services. NAICS 541310 has a size standard of $12.5 million and NAICS
541330 has a size standard of $25.5 million. Accordingly, the same
company may qualify as small under NAICS 541330 but not under NAICS
541310. Thus, the issue of the elevator industry is not unique.
The SBA regulations allow small business general prime contractors
to subcontract up to 85% of the value of work, excluding the cost of
materials, to companies that are not similarly situated entities (see
13 CFR 125.6(a)(3)). Similarly, SBA regulations allow small business
specialty trade prime contractors to subcontract up to 75% of the value
of work, excluding the cost of materials, to companies that are not
similarly situated (see 13 CFR 125.6(a)(4)).
SBA's regulations in 13 CFR 21.406(b) require contracting officers
to designate an appropriate NAICS code (along with applicable size
standard) that best describes the principal purpose of the product or
service being acquired. If it is believed that the contracting
officer's NAICS code designation or size standard is not appropriate,
SBA's regulations in 13 CFR 121.1102 allow the interested parties to
appeal that NAICS code designation with the SBA's Office of Hearings
and Appeal (OHA). Procedures for appealing a NAICS code or size
standard designation are set forth in 13 CFR 121.1103.
Regarding the commenter's suggestion that SBA create a new NAICS
code representing the elevator industry, SBA does not have authority to
create or modify a NAICS code. In collaboration with the Statistical
Agencies of the United States, Canada, and Mexico, every five years,
the Economic Classification Policy Committee (ECPC) within the Office
of Budget and Management (OMB) creates new NAICS codes or revise the
existing codes. Any comment or supporting documentation for creating a
new NAICS code for the elevator industry should be directed to the
ECPC's comment and notice process for the quinquennial NAICS
revisions.\9\
---------------------------------------------------------------------------
\9\ NAICS Update Process Fact Sheet on the NAICS website at
<a href="https://www.census.gov/naics/reference_files_tools/NAICS_Update_Process_Fact_Sheet.pdf">https://www.census.gov/naics/reference_files_tools/NAICS_Update_Process_Fact_Sheet.pdf</a> provides tentative schedules for
considerations of changes to NAICS for 2027.
---------------------------------------------------------------------------
With respect to the suggestion to establish a 1,000-employee size
standard for the new NAICS code for the elevator industry, historically
SBA has been using receipts, not employees, as a measure of business
size for construction-related industries. In industries where
subcontracting is high, such as construction-related industries, SBA
prefers to use receipts as a measure of size standards. When a prime
contractor subcontracts out a portion of a contract, the value of
contract being subcontracted out is counted toward prime's receipts,
but subcontractor's
[[Page 74125]]
employees doing the work are not counted toward primes' employee count.
Thus, an employee-based size standard may lead to excessive
subcontracting in those industries.
The Small Business Act limits the SBA's ability to establish a
common size standard for related industries, such as elevator
maintenance, repair, modernization, and construction industries. The
statute permits establishing a common size standard by grouping all
industries within the NAICS 4-digit level provided that the data
supports the same size standard for each of those industries in the
group, which is not the case for industries related to elevator
maintenance, repair, modernization, and construction.
As stated elsewhere in this document, the concerns regarding the
size standards for specific industries are beyond the scope of the
Revised Methodology. The Methodology merely provides an analytical
framework for reviewing existing and calculating new size standards.
SBA's actual decisions to change or modify size standards are
implemented through rulemakings. SBA encourages the commenter to submit
their concerns regarding the size standards for specific industries,
including any relevant industry data and analysis, by commenting on the
forthcoming proposed rules reviewing size standards for their
industries.
ITVAR NAICS 541519 (Footnote 18).
An advocacy organization for small and mid-size companies submitted
as comment the testimonies of two information technology value added
resellers (ITVAR) firms provided to the House Small Business Committee
Hearing on size standards, held on February 6, 2024.\10\ Both
testimonies (commenters) outlined their success as a Federal ITVAR and
challenges they face in competing on information technology (IT)
procurement opportunities.
---------------------------------------------------------------------------
\10\ Those testimonies are available in entirety at the
following links: <a href="https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-MooreB-20230206.pdf">https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-MooreB-20230206.pdf</a>; <a href="https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-LambkeJ-20230206.pdf">https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-LambkeJ-20230206.pdf</a>.
---------------------------------------------------------------------------
The commenters maintained that small business ITVARs play an
important role in meeting the Government IT procurement needs in three
ways: (1) obtaining IT equipment and supporting services from a single
source; (2) acquiring multiple multivendor IT products from a single
acquisition; and (3) customizing computer hardware or software. They
pointed out that ITVARs provide cost-effective IT solutions to the
Government by serving as an intermediary between the Government and
creators of IT hardware and software, usually known as the original
equipment manufacturers (OEMs). Besides selling the IT hardware and
software, ITVARs also provide the Government with beneficial value-
added services, including, but not limited to, configuration consulting
and design, systems integration, installation of multi-vendor computer
equipment, customization of hardware or software, training, product
technical support, maintenance, and end user support, they added. The
commenters have identified the following challenges small business
ITVARs face in the Federal marketplace and potential solutions to
address them. These are summarized below even though these issues are
outside the scope of the Revised Methodology.
Challenges
1. The changing landscape of the IT procurements.
The commenters explained that, in 2003, SBA created a new
subindustry category or ``exception'' for ITVARs under NAICS 541519,
Other Computer and Related Services, with a size standard of 150
employees (68 FR 74833; December 29, 2003).\11\ For this, SBA created a
new footnote (Footnote 18), which provides a definition of an ITVAR and
describes the circumstances under which a procurement could properly be
classified under the ITVAR exception and its 150-employee size
standard, the commenters noted. When SBA first established the ITVAR
exception, IT procurement market was vastly different than it is today,
they argued. The commenters contended that selling to the Government
then was much simpler and required fewer employees than it does now.
They claimed that today Federal customers need much more complex IT
solutions that include artificial intelligence (AI), robotics,
cybersecurity, and cloud computing. As the focus of Government spending
shifts more and more towards innovation and meeting its burgeoning
technology needs, small businesses, including small ITVARs, are
providing the Government with IT more than ever before, the commenters
noted. The current regulatory landscape includes a patchwork of rules
and regulations specific to small businesses and the IT industry that
have made it challenging, and in some cases impossible, for small
business ITVARs to participate in the Federal market without
potentially violating the law, they asserted.
---------------------------------------------------------------------------
\11\ For Federal contracts that combine substantial services
with the acquisition of computer hardware and software, in 2002, SBA
proposed establishing a new ITVAR subindustry or ``exception''
category under NAICS 541519, Other Computer Related Services, with a
size standard of 500 employees (67 FR 48419; July 24, 2002). SBA
received a total of 291 comments, of which 276 or 95% opposed the
proposed 500-employee size standard for the newly created ITVAR
exception in support for a smaller size standard. In the final rule,
SBA adopted 150 employees.
---------------------------------------------------------------------------
SBA Response
The changing landscape with respect to IT procurements is not
necessarily bad for the ITVAR contractors or the Government. With
introduction of category management, strategic sourcing, and other
initiatives in the Federal market, the changing Federal procurement
landscape has touched most sectors and industries with a significant
Federal spend. The changing IT landscape of the Federal market has led
to improvement and modernization of how agencies purchase IT goods and
services, resulting in creation of value, efficiency, and innovation of
procurement activities, while reducing risks and costs. By adopting
current best practices, agencies can secure cost savings and improve
quality of products and services being acquired. SBA small business
rules and regulations are intended to serve the interests of small
businesses that need Federal assistance the most.
2. 15-50% value-added services requirement.
Footnote 18 requires an ITVAR classified under NAICS 541519 to
provide multivendor hardware and software along with significant value-
added services, the commenters asserted. They stated that Footnote 18
provides that an IT procurement classified under the ITVAR exception
and its 150-employee size standard must consist of at least 15% and not
more than 50% of these value-added services, as measured by the total
contract price. However, much of the value-added services provided by
ITVARs occur prior to contract award and/or are built into existing
pricing and not separately charged, commenters contended. Commenters
asserted that, under the current rule, measuring the percent of value-
added services as compared to the total contract price, the 15-50%
value-added requirement is unrealistic and will increase the costs to
the Government. They argued that ITVARs generally do not charge
separately for value-added services whose costs are incorporated into
the company's overhead costs. As such, the value-added services often
do not account for 15% of the total contract price, they noted.
[[Page 74126]]
SBA Response
Footnote 18 provides that if the contract consists of less than 15%
of value-added services, then it must be classified under a
manufacturing NAICS industry. If the contract consists of more than 50%
of value-added services, then it must be classified under the NAICS
industry that best describes the predominate service of the
procurement. If it is believed that the NAICS code contracting officers
designate to a solicitation is not correct, SBA regulations in 13 CFR
121.1102 allow the interested parties to appeal the contracting
officer's decision to SBA's Office of Hearings and Appeal (OHA).
3. The nonmanufacturer rule (NMR) and waivers.
The commenters noted that, under Footnote 18, an ITVAR contractor
must comply with the NMR. They stated that this is a change to the
regulation SBA made in 2016 (81 FR 4436; January 26, 2016). Prior to
this, an ITVAR contractor was not subject to the NMR, they argued. The
commenters maintained that specific to supply contracts, the NMR allows
a small business to supply products it did not manufacture if certain
requirements are met, including that the supplied products were
manufactured by another small business. They stated that small
businesses may supply products manufactured by any size business if the
SBA grants a waiver of the NMR. In most cases, the Government requires
the ITVARs to provide computer hardware and software manufactured or
produced from large OEMs, they argued. Thus, applying the NMR to
procurements of IT products presents several challenges for small
business ITVARs and, in many cases, is inconsistent with what agencies
specifically require in their solicitations, they contended. The
commenters argued that while class waivers exist for some hardware,
currently, there are no class waivers for software products. Thus, a
small business ITVAR cannot participate in opportunities involving the
purchase of commercial software manufactured by large businesses even
where the Government specifically requires such software, they
reasoned. Rather, small businesses can participate in such
opportunities only when the contracting officer requests an individual
waiver, the commenters claimed. Notably, it is not mandatory for the
contracting officer to request an individual waiver, they noted. They
contended that, in most cases, the contracting officer will choose not
to seek a waiver, even if the acquisition is set up as a small business
set-aside for product for which there is no small business
manufacturer. They declared that this practice flies in the face of
established rules and sets up unwary ITVAR contractors to violate the
NMR (and, potentially, the False Claims Act) simply for following the
requirements set forth by the Government.
SBA Response
If a small business set-aside IT procurement classified under the
ITVAR exception includes products for which there are no small
businesses manufacturing the product being acquired, SBA regulations in
13 CFR 121.406(b)(5) allow the contracting officers, and in some cases
the public, to request a waiver of the NMR from SBA. There are two
types of waivers of the NMR: class waivers and individual waivers. SBA
grants a class waiver only upon its determination that no small
business manufacturer or processor of the product or class of products
is available to participate in the Federal procurement market. SBA
issues an individual waiver if the Agency determines that no small
business manufacturer or processor reasonably can be expected to offer
a product meeting the specifications (including period for performance)
required by a particular solicitation.\12\ The procedures for
requesting and granting these waivers are set forth in 13 CFR 121.1204.
---------------------------------------------------------------------------
\12\ SBA has granted several individual waivers for software
products under NAICS 513210, Software Publishers.
---------------------------------------------------------------------------
4. Inappropriate use of NAICS.
The comments stated that the Government uses the NAICS codes to
identify the purpose of a procurement and to identify the size standard
a business must meet to qualify as small for that procurement. When
issuing solicitations, contracting officers must designate a single
NAICS code that best describes the principal purpose of the product or
service being acquired, they attested. They argued that, often, an IT
procurement may be a mixed procurement, involving both products and
services. However, the contracting officer still must assign a single
NAICS code according to the component that accounts for the greatest
percentage of contract value, they asserted. The commenters argued that
this causes problems for ITVARs that provide both products and
services. ITVARS offer computer hardware or software and/or services
that reasonably can be classified either under a supply or a service
NAICS code, they declared. They argued that the existing NAICS codes
are not appropriate for small business ITVARs. Establishments that
primarily provide services are classified under a service NAICS code,
they added. The commenters maintained that small business ITVARs
primarily provide computer hardware, software, and related products
(supplies) along with some services that cannot be classified under the
service NAICS codes. Likewise, the supply codes cover establishments
that manufacture a specific product, they argued. Commenters contended
that since products ITVARs provide often are manufactured by other
companies, small business ITVARs do not fit neatly under the supply
NAICS codes either.
SBA Response
SBA's regulations in 13 CFR 121.402(b) require contracting officers
to designate an appropriate NAICS code that best describes the
principal purpose of the product or service being acquired. If it is
believed that the contracting officer's NAICS code designation is not
appropriate, SBA's regulations in 13 CFR 121.1103 allow the interested
parties to appeal that NAICS code designation to the SBA's Office of
Hearings and Appeal (OHA). As stated elsewhere in this document, the
nonmanufacturer rule allows contractors to supply products that they
did not manufacture or produce.
Recognizing that the ITVAR exception has led to misuse,
inconsistency, and confusion with respect to designation of NAICS codes
for ITVAR solicitations by contracting officers, in 2014, as part of
the first 5-year review of size standards under the Jobs Act (79 FR
53646; September 10, 2014), SBA proposed eliminating the ITVAR
exception (and Footnote 18) to address those issues. By definition,
ITVAR contracts account for 15-50% of value-added services and 50-85%
of computer hardware and software (supplies). Thus, by definition, the
ITVAR exception is for contracts that are primarily for supplies, with
some services. As stated in the 2014 proposed rule, if the ITVAR
exception is eliminated, all ITVAR contracts would be reclassified
under the employee-based size standard for the manufacturing industries
or under the 500-employee NMR size standard. IT procurements with more
than 50% of services will be appropriately classified under services
NAICS codes. However, in response to overwhelming comments against
eliminating the ITVAR exception, in the final rule, SBA retained the
ITVAR exception along with 150 employees, but subjected the supply
component of the ITVA contracts to manufacturing requirements
[[Page 74127]]
and the NMR (81 FR 4436; January 26, 2016).
5. Increased compliance requirements.
With changes in IT procurement landscape, the burden placed on
ITVARs has increased drastically as well, the commenters explained.
They argued that numerous employees are needed for compliance. ITVARs
are required to obtain a wider breadth of knowledge with multiple OEMs
than an IT service company would, they contended. They claimed that
small business ITVARs are not exempt from these requirements from the
Government nor from the OEMs. They held that to stay under the 150-
employee size standard, small business ITVARs must sacrifice hiring at
the expense of obtaining and maintaining Government mandated
certifications, or forgo obtaining required certifications with the
OEMs, which hurts the portfolio of products they are able to offer and
also negatively affects their pricing discounts and profitability. With
an increased focus on secure supply chain and numerous certification
requirements (such as International Organization for Standardization
(ISO) certifications, cybersecurity maturity model certification
(CMMC), supply chain risk management, ITAR, security clearances,
affirmative action and others), ITVARs must now hire employees to
manage compliance, the commenters contended. They argued that OEM
partners also require ITVARs to hold advanced certifications to be
authorized to sell their products. Government customers also require
advanced OEM certifications to bid on certain procurements, they added.
It is often difficult for small business ITVARs to navigate these
issues particularly, where the Government has set aside a procurement
based on an inappropriate NAICS code, the commenters noted.
SBA Response
Maintaining compliance is not unique to delivering IT goods and
services to Government agencies under the ITVAR exception. Contractors
providing goods and services in other industries are also required to
ensure that they comply with applicable existing law and regulations.
Larger small businesses are likely to maintain in-house specialized
workforce dedicated to carry out compliance work, while smaller small
business are likely to hire external consultants and attorneys.
Achieving compliance with regulations, law and other requirements would
reduce the ITVAR contractors' risks of violating law and facing fines,
debarment, or other penalties. Compliance with applicable law and
regulations would also provide confidence to the Federal clients,
thereby increasing the likelihood of wining Federal contracts.
Requirements for increased knowledge, qualifications/certifications,
and capabilities to participate in the delivery of IT products can not
only enhance the quality of IT goods and services being procured by the
Government by ensuring that they meet its specifications and standards,
but also enhance contractors' ability to meet Government needs.
6. Industry consolidation and size standard.
The commenters stated that there is increased consolidation and
acquisitions in the ITVAR industry. It is common for ITVARs, once they
exceed 150 employees, to sell their businesses, they argued. The
commenters contended that these ITVARs, who usually have years of
experience in Government contracting and proven capabilities, are
purchased by larger industry competitors or private equity firms. There
has been a mass exodus of firms from the industry once they exceed the
size standard, they asserted. They argued that this hurts the Federal
agencies as they lose small businesses and qualified suppliers who are
often replaced with less qualified and less capable suppliers. The
unicorn in the ITVAR industry has become those companies with between
151 employees and 500 employees, they noted. They claimed that to go
from successfully competing as a small business to competing with large
companies, like CDW and IBM, is an improbable endeavor for a small
ITVAR. The result is an erosion of the supplier base that has valuably
served the Government, the commenters argued. Not only does the
Government suffer under this scenario, but so do the employees and the
communities where these businesses are located as the acquiring
companies or private equity firms are headquartered in larger
metropolitan areas, the commenters contended. They pointed out that
increasing the employee size limit to 500 employees would insure there
are ample small businesses that are qualified to meet the increasing
demands of today's Government customers.
SBA Response
The commentary that small businesses, once they exceed their size
standards, are acquired by large corporations or private equity firms
is not unique to ITVAR firms. SBA frequently receives such concerns
from businesses in other industries as well. SBA believes that such
concerns would remain regardless of how high the size standards are.
For example, SBA's recent increases to size standards have not
alleviated these concerns. SBA increased 604 size standards under the
first 5-year review of size standards and 436 size standards under the
second 5-year review of size standards. Additionally, SBA has
periodically increased its monetary-based size standards for inflation.
SBA also has increased the averaging periods for calculating annual
receipts for size standards from 3 years to 5 years and for calculating
the average number of employees for size standards from 12 months to 24
months, thereby extending the runway for small businesses to
successfully transition from small business to mid-size or large
business status in the Federal marketplace. With respect to the
commenter's suggestion to increase the ITVAR size standard to 500
employees, SBA will review that size standard as part of the
forthcoming third 5-year review of size standards under the Jobs Act
and determine if it needs to be revised. The commenters are advised to
submit their comments when SBA issues a proposed rule with the results
of its analysis.
7. Limitations on subcontracting rule.
The commenters maintained that, for both supplies and services, the
limitations on subcontracting rule (``LOSR'') requires that a small
business not subcontract more than 50% of the prime contract amount to
businesses that are not ``similarly situated.'' In contracts for mixed
procurements (i.e., both supplies and services), the LOSR applies only
to subcontracts that correspond to the principal purpose of the prime
contract, they argued. The commenters contended that the LOSR is
problematic for small business ITVARs that resell to the end-user IT
products (e.g., hardware, computers, etc.) and/or services (e.g.,
cloud, hardware/software maintenance, etc.) that mostly originate from
other companies. Often, the products and services the Government
requires under the ITVAR solicitation are provided only by large
companies, and easily exceed 50% of the total contract amount, the
commenters reasoned. Thus, the commenters argued, the LOSR has the
effect of eliminating small business ITVAR participation in many
Federal acquisitions for IT products and services although they are
set-aside for small businesses.
SBA Response
In accordance with SBA's regulations in 13 CFR 125.6(a)(2),
procurements of supplies from a nonmanufacturer of such supplies are
exempt from the
[[Page 74128]]
LOSR. In other words, the NMR supersedes the LOSR. In the case of a
contract for supplies from a nonmanufacturer, a small business will
comply with all requirements at 13 CFR 121.406(b)(1) to qualify as a
nonmanufacturer, including supplying the product of a domestic small
business manufacturer or processor, unless a waiver is granted pursuant
to SBA's regulations in 13 CFR 121.406(b)(5). If a waiver is granted,
the offeror is not required to comply with the NMR requirements.
8. Potential liability for small businesses.
The commenters contended that the Government regularly issues
solicitations under inappropriate NAICS codes, thereby inviting small
business ITVARs to violate the Small Business Act and exposing them to
risk of fines, debarment, or other penalties. There is little
compliance oversight by the Government with respect to NAICS codes,
they claimed. Rather, the onus has shifted to small business ITVARs to
use scarce time and resources to police Government agencies via NAICS
code protests, the commenters stated. They held that relying on
protests to check this frequent misuse is unrealistic, costly, and
unfair for small business ITVARs. Another issue facing small business
ITVARs is misapplication of the ITVAR code, for example, as when the
contract includes services that account for less than 15% of the total
contract price, the commenters argued. They mentioned that, in this
situation, small business ITVARs can choose to bid, knowing they will
not provide value-added services that account for 15-50% of the total
contract price as required by the ITVAR exception, and thus potentially
setting themselves up for an allegation that they have violated the law
or made a false certification. Or, the small business can forgo the
opportunity altogether, while less risk-averse competitors are awarded
the work, the commenters argued. Where a small business ITVAR
contractor is not compliant with the SBA regulations, it is susceptible
to size protests, potential suspension or debarment, or False Claims
Act liability, they pointed out. Thus, simply by submitting a proposal
where the business cannot comply with the NMR, or with the 15-50%
service requirement under the ITVAR exception, a small business
contractor could potentially expose itself to False Claims Act
liability, suspension or debarment, a size protest by a competitor,
contract termination, and loss of business, the commenters declared.
SBA Response
Pursuant to SBA's regulations in 13 CFR 121.402(b), Federal
agencies are required to select a single NAICS code for an acquisition
that best describes the principal purpose of the service or product
being acquired. If businesses believe that the NAICS code selected by
the contracting officer for the contract is inappropriate, pursuant to
13 CFR 121.1103, they can file a NAICS code appeal with the SBA's
Office of Hearings and Appeals (OHA). However, because contractors do
not have affirmative responsibility for ensuring that the NAICS code
selected by a contracting officer is appropriate, they are not liable
for bidding on or performing solicitations for which the NAICS code
selected by the contracting officer is inappropriate. The determination
on whether an ITVAR contract meets the 15-50% service requirement is
made prior to the award and does not become the terms and conditions of
the contract. Accordingly, small business ITVAR contractors may not be
liable even though value-added services account for less than 15% or
more than 50% of the contract value. However, when the NMR requirement
falls under the terms and conditions of the contract, small ITVARs are
bound to comply with the NMR unless there is a waiver.
9. Software NAICS 513210 (Footnote 15).
The commenters maintained that, in 2016, SBA promulgated a new rule
relating to NAICS 513210, Software Publishers, providing that
unmodified, commercially available software supplied in procurements
under that NAICS code is an item of supply rather than a service, thus
subjecting these items to the NMR (81 FR 34243; May 31, 2016). The
commenters stated that, for this, the SBA created a new footnote
(Footnote 15), which explains that NAICS 513210 is the proper NAICS
code to use when the Government is purchasing COTS (``commercial-of-
the-shelf'') software, which is eligible for a waiver of the NMR. The
Characterization of COTS software as a product subject to the NMR
presents the added complication of seemingly conflicting size standards
applicable to these procurements, the commenters reasoned. NAICS
513210, a services code, has a revenue-based size standard of $47
million, while a company may also qualify as small under the NMR based
on a size standard of 500 employees, they noted.
The commenters pointed out that one consequence of changing the
classification for COTS software to a supply was that the NMR then
became applicable to procurements for this type of software, and
waivers then could be sought. The 2016 rule amended the SBA's
regulations that SBA may grant an individual waiver for the procurement
of software, provided that the software meets certain conditions, the
commenters noted. The commenters held that individual waivers may be
requested by contracting officers and the public can request that SBA
issue class waivers for software items. However, they argued that, in
practice, contracting officers have been reluctant to request a
contract specific waiver, and, to date, no class waivers for software
have been granted.
Commenters contended that a class waiver for the Footnote 15
portion of NAICS 513210 would be appropriate for resolving many of the
issues facing small business ITVARs for four reasons: (1) the COTS
software procured under NAICS 513210 is overwhelmingly manufactured by
large businesses that it obviates the purpose of the NMR; (2) the small
business set-asides are almost universally in violation of the NMR; (3)
these violations are almost forced by the Government's dual need for
both large business software and small business credit, leading to
improper solicitations; and (4) this situation invites small businesses
to expose themselves to the risk of misrepresenting their size status.
The commenters pointed out that the Government regularly posts
solicitations for acquisitions of COTS software manufactured by large
businesses that are classified under NAICS 513210 and set-aside for
small businesses. The NMR applies to these solicitations unless the
contracting officer has obtained a waiver from SBA, the commenters
argued. If a waiver is granted, the solicitation can be set-aside for
small businesses, and the small business awardee can provide an end-
product made by any size manufacturer, they added. In practice, waivers
are rarely obtained, the commenters argued. They asserted that if the
solicitations do not include a waiver of the NMR, any small business
awardee must provide an end-product made by a small business
manufacturer. In many instances, this is not possible because the
Government often specifically requests items manufactured exclusively
by large businesses, or because certain products are not manufactured
by small businesses, the commenters argued. They contended that,
without a waiver, any small business awardee that provides the required
COTS software (manufactured by a large business) under a set-aside is
violating the Small Business Act, opening itself to liability
[[Page 74129]]
under the False Claims Act for making false statements and
certifications to the Government, and subjecting itself to a host of
other negative consequences--all at the behest of the Government
agency.
SBA Response
SBA grants a class waiver of the NMR for a class of products or
supplies only upon the determination that no small business
manufacturer or producer is available in the Federal market for such
products or supplies. The procedures for requesting and granting class
waivers are contained in 13 CFR 121.1204. Any interested person,
business, association, or Federal agency may submit a request for a
waiver for a particular class of products. Requests should be addressed
to the Director, Office of Government Contracting, Small Business
Administration, 409 3rd Street SW, Washington, DC 20416. Requests for a
waiver of a class of products should include a statement of the class
of products to be waived, the applicable NAICS code, and detailed
information on the efforts made to identify small business
manufacturers or processors for the class of products. If SBA decides
that there are small business manufacturers or processors in the
Federal procurement market, it will deny the request for waiver, issue
notice of the denial, and provide the names, addresses, and telephone
numbers of the sources found. If SBA does not initially confirm the
existence of small business manufacturers or processors in the Federal
market, it will: (i) publish notices in the Commerce Business Daily and
the Federal Register seeking information on small business
manufacturers or processors, announcing a notice of intent to waive the
NMR for that class of products and affording the public a 15-day
comment period; and (ii) if no small business sources are identified,
publish a notice in the Federal Register stating that no small business
sources were found and that a waiver of the NMR for that class of
products has been granted. SBA my expedite the procedure for issuing a
class waiver under emergency situations (see 13 CFR 121.1204(5)). SBA
has granted several individual waivers for the COTS software under
NAICS 513210. If commenters feel that SBA can reasonably issue a class
waiver for this code, then an interested party should request one and
provide the required documentation.
Proposed Solutions
The commenters declared that the current system for classifying and
executing procurements involving ITVARs has serious flaws that should
be addressed. They stated that any comprehensive solution must: (1)
create a new industry by recognizing what ITVARs actually do (i.e., the
type and mix of services and products they provide); (2) capture and
account for how services currently are billed to the Government, and
eliminate the 15-50% value-added requirement; (3) provide a realistic
size standard that is not over- or under-inclusive; and (4) address the
NMR requirements for COTS procurements.
1. Creation of the new NAICS code.
The commenters pointed out that, while there are a number of
possible solutions, the most viable and sensical solution is to create
a new NAICS code that accurately captures the core competency of the
ITVAR, accompanied by creation of an appropriate SBA size standard and
elimination of the ITVAR exception at Footnote 18. They contended that
the new code should focus on the ITVAR's role as a consultant that
provides pre-sales engineering and subject matter expertise on a
variety of software and hardware products. Ideally, the Economic
Classification Policy Committee (ECPC) within OMB will create a new,
stand-alone NAICS code for ITVARs, they noted. Once established, the
SBA should then revise its current size standard accordingly and
eliminate Footnote 18 under NAICS 541519, the commenters added.
SBA Response
In 2014, because of inconsistencies, confusion and misuse
surrounding the application of NAICS codes for ITVAR contracts, SBA
proposed to eliminate the ITVAR exception, along with its 150-employee
size standard and the accompanying footnote (Footnote 18) under NAICS
541519 (79 FR 53646; September 10, 2014). SBA received a total of 168
comments, of which 163 opposed the SBA's proposal. In response, SBA
retained the 150-employee size standard and Footnote 18, while
subjecting the supplies component of an ITVAR contract to the
manufacturing performance requirements and the NMR.
Any documentation and information in support of the creation of a
new NAICS for the ITVAR industry should be directed to the ECPC within
OMB. As stated elsewhere in this document, in collaboration with
Statistical Agencies from the U.S., Mexico and Canada, the ECPC, every
5 years, creates new NAICS codes or revises the existing ones. The
NAICS website has established a factsheet regarding the time schedules
for the 2027 NAICS revisions.
2. Elimination of the 15-50% service requirement.
The commenters contended that the SBA's size standard for the new
NAICS code must not include a service requirement that is based on a
percent of the total contract price, but it should be based on value-
added services provided by a typical ITVAR. The commenters noted that
the current ITVAR 15-50% services requirement ignores the reality in
following ways: (1) the fixed cost of the component far exceeds the
cost of the services and implementation of equipment, and (2) the
provided services generally are not separately billed. The commenters
stated that ITVARs provide valuable services to the Government, but the
costs of those services are included in overhead costs, covered by
narrow margins on the IT products, and not separately charged.
Therefore, the current requirement that services account for 15-50% of
the total contract price is unattainable and should be eliminated under
the new size standard, the commenters argued.
SBA Response
The 15-50% service requirement provides that if the contract
consists of less than 15% of value-added services, then it must be
classified under a manufacturing NAICS industry. If the contract
consists of more than 50% of value-added services, then it must be
classified under the NAICS industry that best describes the predominate
service of the procurement. SBA is concerned that eliminating the 15-
50% requirement would lead the contracting officers to improperly apply
the ITVAR exception, instead of the manufacturing NAICS code, to IT
procurements where the value-added services account for less than 15%
of the contract value. Similarly, the elimination of the 15-50%
requirement would encourage the contracting officers to use the ITVAR
exception, at the expense of small business services firms, for IT
acquisitions that account for more than 50% of value-added services.
3. Revision to the size standard.
As soon as practicable, after the new NAICS code is established,
SBA should revise its size standard to account for the new NAICS code
and institute an appropriate employee-based size standard, the
commenters argued. Recognizing that ITVARs typically operate on low
margins even though their annual receipts may be high, the size
standard should be based on employee count rather than annual revenue,
the commenters reasoned. The commenters attested that a reasonable
[[Page 74130]]
size standard for the new code is 500 employees.
SBA Response
It should be noted that SBA proposed a 500-employee size standard
when it first created the ITVAR exception (67 FR 48419; July 24, 2002).
As discussed in detail in the final rule (68 FR 74833; December 29,
2003), of a total of 291 comments received, 276 or 95% of comments
opposed the proposed 500-employee size standard for the ITVAR exception
in support of a smaller size standard. Commenters argued that
businesses with 500 employees are not small in the ITVAR industry, and
that smaller IT businesses are not competitive against businesses with
hundreds of employees. The commenters contented that, under the
proposed 500-employee size standard, Federal agencies are more likely
to award ITVAR contracts to the larger small businesses at the expense
of much smaller businesses. Several comments considered a 500-employee
ITVAR firm to be dominant in this field, and therefore does not meet
the Small Business Act's statutory definition of a small business which
excludes dominant businesses as small. Finally, the commenters argued
that a vast majority of firms engaged in the ITVAR industry are much
smaller than 500 employees. Commenters to the 2014 proposed rule (79 FR
53646; September 10, 2014) that proposed eliminating the ITVAR
exception (along with Footnote 18) validated the above concerns.
4. Elimination of the NMR requirements.
With respect to qualifying as a small business under the new NAICS
code, SBA should acknowledge that the NMR is explicitly inapplicable,
the commenters argued. Because ITVARs, by definition, do not
manufacture the products they resell, it is nonsensical to require them
to comply with the NMR--particularly where solicitations overwhelmingly
seek COTS items manufactured by large businesses, the commenters held.
They maintained that both the ITVAR code (NAICS 541519, Footnote 18)
and the COTS code (NAICS 513210, Footnote 15) require compliance with
the NMR, but allow for waivers of the NMR. Rather than eliminating the
NMR with respect to procurements using these codes, SBA opted to put
the onus on agencies to seek waivers, they noted. In practice, this has
not been a viable solution, as shown by how ineffective and
underutilized the waiver has been to date, the commenter argued.
Contracting officers have been reluctant to request contract specific
waivers and, to date, no class waivers for software have been granted,
they added.
SBA Response
Considering the rapid pace of development in the IT industry, SBA
believes that it is not unreasonable to assume that there will be new
products purchased by the Federal Government using the ITVAR exception
in the future that will be manufactured by small businesses. Thus, by
eliminating the NMR for the ITVAR exception, SBA could disadvantage
small firms who are currently offering, or plan to offer products to
the Government. SBA also believes it would be inconsistent with the
intent of the Small Business Act if ITVAR resellers could provide the
supplies produced primarily by large OEMs, or other large
manufacturers, without the NMR. SBA is concerned that without the
compliance with the NMR, the ITVAR exception may allow small business
ITVARs to simply serve as ``pass throughs'' for large OEMs and other
large manufacturers. While SBA recognizes that the NMR may work better
for some products than for others, it strongly believes that the rule
must apply to all supply contracts equally. Thus, like all other
products and supplies, the nonmanufacturer rule must also apply to IT
products, including those purchased through the ITVAR exception.
5. Blanket waivers.
The commenters stated that a separate work-around involves
obtaining waivers. One way to allow small businesses to supply software
manufactured by large corporations is to secure an individual waiver
issued for a vehicle that covers a full array of IT orders of a
Government department, the commenters contended. They noted that, in
2020, the Department of Homeland Security (DHS) obtained an individual
waiver from SBA for all the products and services to be procured under
the FirstSource III. Under FirstSource III, any commercial IT product
would be available, including products manufactured by large companies,
they added. The commenters pointed out that, notably, FirstSource III
will have two NAICS codes, NAICS 541519 (ITVAR) and NAICS 513210
(Software Publishers). To resolve the NMR issues, DHS is pursuing an
individual contract level NMR waiver for FirstSource III, the
commenters added. If SBA approves the wavier, there would be no need
for individual waivers for each order under FirstSource III, the
commenters reasoned. They attested that DHS's attempt to secure a
blanket waiver for the FirstSource III contract signals the
Government's recognition of the need to change the rules to adapt to
the evolving IT landscape. The commenters argued that a broader change
is warranted for other types of IT procurements, particularly for those
involving small business ITVARs.
SBA Response
As explained above, SBA's regulations in 13 CFR 121.1204(a) allow
Federal agencies to request for class waivers of the NMR from SBA if
they, based on market research, demonstrate that there are not small
businesses that manufacture or produce a class of IT hardware and
software. For example, in 2020, SBA granted a class waiver of the NMR
for commercially available off-the-shelf laptops and tablet computers
under NAICS 334111, Electronic Computer Manufacturing (85 FR 13692;
March 9, 2020). Procedures for requesting individual waivers are laid
out in 13 CFR 121.1204(b). SBA has granted several individual waivers
for the COTS software under NAICS 513210 and computer hardware and
software under NAICS 541519.
D. Public Forums
As mandated by section 1344 of the Jobs Act, SBA is required to
hold not less than two public forums during its quinquennial review of
size standards. SBA held two virtual public forums on size standards to
update the public on the status of the ongoing five-year reviews of
size standards under the Jobs Act and to consider public feedback on
changes contained in the Revised Methodology. The two virtual public
forums were held on January 23, 2024, and on January 25, 2024. Over the
course of the two days, of 44 total participants, SBA received
testimony from one commenter, mostly relating to the SBA's approach to
evaluating the size standard for the ERS exception under NAICS 562910,
Remediation Services. The comment received during the virtual public
forums is included in the count of comments above.
The comment expressed general support for the SBA's Revised
Methodology and its data-driven approach to size standards. The
commenter argued, unlike other `exceptions'' that are NAICS subindustry
categories, the ERS exception is a superindustry category, because it
consists of activities from several different NAICS industries. The
commenter expressed concern over SBA's approach to creating the ERS
industry by trimming the largest environmental companies for which the
ERS work is not a primary source of their total revenues. The commenter
[[Page 74131]]
argued that large competitors in the ERS industry have a serious
advantage over smaller businesses in terms of winning and executing
work, even where only a small portion of their total revenue comes from
ERS work. Large firms can leverage their vast resources, extensive
experiences and economies of scale that give them a tremendous
competitive advantage over a small business making roughly similar
revenue. Thus, SBA should not trim such companies, the commenter noted.
If SBA believes that trimming is necessary, it should provide a list of
companies that were trimmed so that the public can comment on its
analysis, the commenter added. The commenter also urged SBA to let the
data drive the results rather than policies. The commenter also
submitted a more detailed comment to <a href="http://www.regulations.gov">www.regulations.gov</a>, which has
been summarized above.
SBA response: SBA has responded to the ERS concern above.
E. Conclusion
As discussed above, SBA proposed two changes to the Methodology:
(1) adoption of the disparity ratio approach to account for the small
business participation in the Federal market; and (2) use of the FPDS-
NG and SAM data to calculate the 20th percentile and 80th percentile
values of industry factors to evaluate the size standards at the
subindustry levels, usually known as ``exceptions.''
SBA received four comments supporting the adoption of the disparity
ratio approach to measure small business participation in the Federal
market. SBA received three comments addressing the second issue, with
one supporting the SBA's proposal to use FPDS-NG and SAM data to derive
the 20th percentile and 80th percentile values of industry factors to
evaluate exception size standards and two opposing it. As stated
elsewhere, the data from the Census Bureau's Economic Census tabulation
are limited to the six-digit NAICS industry level and therefore do not
provide information on economic characteristics of firms at the
subindustry level. Thus, SBA uses the FPDS-NG and SAM data to derive
the industry factors for exceptions. Therefore, to be consistent, SBA
is adopting FPDS-NG and SAM data to obtain the 20th percentile and 80th
percentile values of industry factors for evaluating size standards for
the NAICS exceptions, instead of using the percentiles from the
Economic Census. As such, SBA is adopting both proposed changes in the
Revised Methodology.
Several commenters submitted comments pertaining to size standards
for specific industries, including the ITVAR exception to NAICS 541519,
the ERS exception to 562910, Software Publishers (NAICS 513210), and a
few other industries. Comments pertaining to specific size standards
are beyond the scope of the Methodology. Those commenters have been
advised to submit their comments when SBA issues proposed rules as part
of the third 5-year review of size standards under the Small Business
Jobs Act of 2010.
Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-20228 Filed 9-11-24; 8:45 am]
BILLING CODE 8026-09-P
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