Being small is not always easy, but in the case of government contracting, it comes with significant advantages. These advantages include: access to limited competition procurements through small business set-aside contracts; availability of SBA-guaranteed loans and surety bonds; and other like advantages. Being small can also allow you to participate in various government programs, such as the 8(a), Woman-Owned Small Business, HUBZone, and Service Disabled Small Business programs, which provide further set-aside opportunities if you qualify.
To qualify as “small”, a business must first be smaller than the size standard for its industry based on the North American Industry Classification System or NAICS Code. Found at 13 CFR §121.201, each NAICS code is based on either the number of employees a business has (mostly in the manufacturing arena) or a dollar amount derived from taking the average annual revenue (or in certain instances, receipts) for the business over the past three years (soon to be five years; see SBA Proposes (Finally) to change method of Calculating Size Status/Annual Revenues). Regulated and determined by the U.S. Small Business Administration (“SBA”), these revenue-based NAICS size standards are required to be reviewed and updated through a periodic SBA rolling review process to account and adjust the size standards for the economy, firm size averages, federal contracting trends, and other like adjustment factors. The SBA is also supposed to review size standards at least once every five years to adjust for inflation. These reviews and adjustments are critical to businesses, as they can “make or break” a company by impacting their status as “small” or “other than small” (nee, large).
On July 18, 2019, the SBA issued a Proposed Interim Final Rulemaking, 84 Fed. Reg. 34621 et seq., in which the SBA has made what this author sees as significant increases to account for inflation in all monetarily-based size standards for seemingly all industries, as depicted in the following table:
84 Fed. Reg. 138 at 34263.
So how does this impact businesses? The following chart utilizes the construction industry to depict the significant increases between present size standards and the proposed new size standards:
As can be readily discerned, these proposed inflationary increases are substantial at both the first (prime or general contractor) and lower-tier levels (subcontractors and suppliers). Perhaps most critically, these new size standards become effective on August 19, 2019 (with comments requested on or before September 16, 2019). While not final, these proposed numbers do become effective on an interim basis on August 19, subject to further adjustment and revisions based on comments received, if any.
This, combined with the recently announced expansion from three to five years to calculate average annual revenue, both should go a long way to increasing the number of small businesses, and increasing competition in government contracting projects. This should also make it easier for prime contractors to meet their small business subcontracting obligations. This is a significant change for government contractors of all sizes, industries and types, and should result in benefits to all interested parties, including the government and private industry.
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