[Federal Register Volume 63, Number 22 (Tuesday, February 3, 1998)]
[Proposed Rules]
[Pages 5480-5484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2609]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards; Engineering Services,
Architectural Services, and Surveying and Mapping Services
AGENCY: Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The Small Business Administration (SBA) is proposing a size
standard of $7.5 million in average annual receipts for general
Engineering Services (part of Standard Industrial Classification (SIC)
code 8711), $5.0 million for Architectural Services (SIC code 8712) and
$3.5 million for Surveying and Mapping Services (SIC code 8713 and part
of SIC code 7389). The current size standard for each of these
industries is $2.5 million. The proposed revisions are being made to
better define the size of business in those industries that the SBA
believes should be eligible for Federal small business assistance
programs.
DATES: Comments must be submitted on or before April 6, 1998.
ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator
for Size Standards, 409 3rd Street, S.W., Mail Code 6880, Washington
D.C. 20416.
FOR FURTHER INFORMATION CONTACT: Robert N. Ray, Office of Size
Standards, (202) 205-6618.
SUPPLEMENTARY INFORMATION: The SBA is proposing a revision to the size
standard for general Engineering Services (part of SIC code 8711) from
$2.5 million to $7.5 million. The other size standards applicable to
Engineering Services under SIC code 8711--Military and Aerospace
Equipment, Military Weapons, Marine Engineering, and Naval
Architecture--are not being reviewed as part of this proposed rule. The
rule also proposes a revision to the size standard for the
Architectural Services industry (SIC code 8712) from $2.5 million to $5
million and a revision to the size standard for the Surveying and
Mapping Services industry (SIC code 8713 and part of SIC code 7389)
from $2.5 million to $3.5 million.
From September 30, 1988 until September 30, 1996, the SBA was
prohibited by statute from changing the size standards for general
engineering services, architectural services, and surveying and mapping
services. These industries are subject to the special procurement
procedures of the Small Business Competitiveness Program (Title VII of
Pub. L. 100-656, 102 Stat. 3853, 3889). This Program specifies special
procedures on the use of small business set-aside contracting for the
procurement of services within the four designated industry groups. The
designated groups are: Construction (SIC codes 1521-1542, SIC codes
1611-1629, and SIC codes 1711-1799); Engineering, Architectural, and
Surveying and Mapping Services (SIC codes 8711, 8712, 8713, and part of
SIC code 7389); Refuse Systems and Related Services (SIC code 4953 and
part of SIC code 4212); and Non-nuclear Ship Repair (part of SIC code
3731). Over the period of 1988 to 1996, the Program included a
provision that prohibited any change to the size standards for the
designated industry groups. However, the Small Business Programs
Improvement Act of 1996 included an amendment to the Program that
repealed the prohibition placed upon the SBA from revising these
industries' size standards (see Omnibus Consolidated Appropriations Act
for Fiscal Year 1997, Division D, Title I, Section 108, Pub. L. 104-
208). In the accompanying legislative history, the Congress indicated
that the SBA should take appropriate action to adjust the size
standards for the designated industry groups, although no specific
guidance was provided on how these size standards should be adjusted by
the SBA. At this time, the SBA is proposing increases to the size
standards for the general engineering services, architectural services,
and the surveying and mapping services industries based on its review
of economic and Federal procurement data for these industries. The size
standards for the remaining designated industry groups are currently
being reviewed by the SBA. A decision will be made in the near future
if revisions to any of these industry size standards should be
proposed. If so, a proposed rule will be published in the Federal
Register.
Below is a discussion of the SBA's size standards methodology and
the analyses leading to the proposed size standards. This is followed
by a discussion of alternative size standards and the estimated
economic impact that the proposed size standards, if adopted, would
have on Federal Government contracting and the SBA's financial
assistance programs.
Size Standards Methodology
In considering the appropriateness of a size standard, the SBA
evaluates the structural characteristics of an industry and the
participation of small business in SBA programs. There are four factors
describing the structural characteristics of an industry: average firm
size; distribution of firms by size; start-up costs; and industry
competition. While these four factors are generally considered the most
important indicators of industry structure, the SBA will consider and
evaluate all relevant information that would assist it in assessing an
industry's size standard. Below is a brief description of the four
industry structure factors.
1. Average firm size is simply total industry revenues (or number
of employees) divided by the total number of firms. The SBA tends to
set higher size standards for industries with an average firm size
significantly higher than the average firm size of a group of related
industries. SBA tends to set lower size standards in industries with a
lower average firm size relative to a related group of industries.
2. The distribution of firms by size examines the proportion of
industry sales, employment, or other economic activity accounted for by
firms of different sizes within an industry. If the preponderance of an
industry's output is by smaller firms, this would tend to support a low
size standard. The opposite would be the case for an industry in which
the distribution of
[[Page 5481]]
firms by size indicates that output is concentrated among the largest
firms in an industry.
3. Start-up costs affect a firm's initial size because entrants
into an industry must have sufficient capital to start a viable
business. To the extent that firms in an industry have greater start-up
capital requirements than firms in other industries, the SBA would be
justified in considering a higher size standard. As a proxy measure for
start-up costs, the industry's ratio between total payroll costs to
sales is examined. An industry with a relatively low proportion of
payroll cost to total sales as compared with the average proportion of
other industries would tend to indicate that it is a capital intensive
industry. For those types of industries, that circumstance suggests a
relatively higher size standard.
4. As an indicator of industry competition, the SBA assesses
competition within an industry as measured by the proportion or share
of industry sales garnered by producers above a relatively large firm
size. For purposes of the analysis in this proposed rule, the
proportion of industry sales generated by the four largest firms in an
industry is examined--generally referred to as the ``four-firm
concentration ratio.'' To the extent that a significant proportion of
economic activity within an industry is concentrated among a few
relatively large producers, SBA tends to set higher size standards to
assist firms in a broader size range to compete with firms that are
dominant in the industry.
SBA has established ``anchor'' size standards of 500 employees for
the manufacturing and mining industries and $5 million for
nonmanufacturing industries. To the extent that the structural
characteristics of an industry are significantly different from the
average characteristics of industries with the anchor size standard, a
size standard higher or lower than the anchor size standard may be
supportable. For the industries under review in this proposed rule, the
characteristics of the four industry factors for each industry were
compared to the average characteristics of the nonmanufacturing
industries with the anchor size standard of $5 million (hereafter
referred to as the nonmanufacturing anchor group). If the
characteristics of an industry are similar to characteristics of the
nonmanufacturing anchor group, then the anchor size standard of $5
million is recommended. If, however, the industry characteristics are
significantly different than the average characteristics of the
nonmanufacturing anchor group, then a size standard above or below $5
million would be appropriate.
As indicated above, the impact of a proposed size standard on SBA's
programs is evaluated in addition to industry structure to determine if
small businesses defined under the existing size standard are receiving
a reasonable level of assistance. This assessment usually involves the
calculation of the proportion or share of Federal contracts awarded to
small businesses. In general, the lower the share of Federal contract
dollars awarded to small businesses in an industry which receives
significant Federal procurement revenues, the greater would be the
justification for a size standard higher than the existing size
standard. In SBA's financial assistance programs, the volume of
guaranteed loans within an industry and the size of firms obtaining
loans are examined to assess whether the current size standard may be
inappropriately restricting the level of financial assistance to firms
in that industry.
Evaluation of Industry Size Standards
SBA analyzed the size standards for the, engineering, architectural
and surveying and mapping services industries by comparing their
industry characteristics with the average characteristics of the
nonmanufacturing anchor group discussed above. The table below shows
the characteristics for each industry and the average characteristics
for the nonmanufacturing anchor group. A review of these factors leads
to a recommended size standard for each industry.
Industry Characteristics of the Nonmanufacturing Anchor Group and the Engineering, Architecture and Surveying Services Industries
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Industry sales by size of firm 4-firm
Average firm ------------------------------------------------ Payroll to concentration Share of gov't
Category size sales ratio procurement
(millions) $5M (percent) $10M (percent) $25M (percent) (percent) (percent) (percent)
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Nonmanufacturing Anchor Group........... $0.85 51.0 61.0 67.0 27.0 15.0 N/A
Engineering Services.................... 1.83 25.9 32.7 40.8 41.8 10.9 17.7
Architectural Services.................. 0.65 64.7 74.7 84.4 39.3 5.4 25.5
Surveying Services...................... 0.28 88.5 90.7 93.6 39.2 3.5 25.8
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General Engineering Services (Part of SIC Code 8711)
SBA proposes a size standard of $7.5 million for the general
engineering services industry based on a review of the industry
characteristics shown above, and based on the share of Federal
procurements obtained by small business. The average firm size of
engineering firms is over twice the average firm size of the
nonmanufacturing anchor group, and supports a size standard moderately
above the $5 million anchor size standard. The distribution of sales by
firm size also supports a size standard significantly above the anchor
size standard. Under this factor, the amount of sales obtained by
engineering firms of $5 million and less in sales, $10 million and less
in sales, and $25 million and less in sales, is significantly less than
found for the anchor nonmanufacturing group. The industry factor of
payroll to sales shows this industry to be more labor intensive than
the nonmanufacturing anchor group. This factor indicates that start-up
costs are relatively low and would support a size standard of not more
than $5.0 million. The four-firm concentration ratio shows that
engineering services is a highly competitive industry where the largest
firms in the industry account for a low share of industry sales. This
factor also supports a size standard at or below $5 million. However,
the percent of Federal contract dollars awarded to small engineering
firms during fiscal years 1995 and 1996 is a relatively small share of
Federal contracting to small firms and supports a size standard much
higher than the current $2.5 million level. Considering these factors
in the aggregate, SBA believes that a size standard moderately higher
than the anchor size standard is appropriate for engineering services.
Accordingly, the
[[Page 5482]]
SBA proposes a size standard of $7.5 million for this industry. This
size standard is above the standard that would have been established in
1994 for this industry if the SBA had had the authority to change it
then based upon inflation since the time of the previous adjustment in
1984.
Architectural Services (SIC Code 8712)
A size standard of $5 million is being proposed for the
architectural services industry. The average firm size of an
architectural firm is similar to those of the average firm size of
industries in the nonmanufacturing anchor group, and supports a size
standard of $5 million. For the industry factor which looks at the
distribution of firms, firms at the three specified size classes for
architectural services obtained a moderately higher proportion of sales
than similar sized firms within the nonmanufacturing anchor group. This
factor supports a size standard at or slightly below $5 million. The
industry factor of payroll to sales reveals that the architectural
services industry is more labor intensive than the nonmanufacturing
anchor group. This factor indicates that start-up costs are relatively
low and would support a size standard of not more than $5.0 million.
The four-firm concentration ratio is below the ratio for the
nonmanufacturing anchor group, and supports a size standard at or below
$5 million. A size standard higher than the current $2.5 million size
standard is supportable in light of the relatively low share of Federal
procurement dollars awarded to small architectural firms during fiscal
years 1995-96. At the current size standard, small businesses account
for 52 percent of industry sales but received only 25.5 percent of
Federal contracting dollars. The SBA believes that since the industry
characteristics are at or slightly below the characteristics of the
nonmanufacturing anchor group, and since a wide disparity exists
between industry sales to small business and the share of Federal
contract awards, the $5 million anchor size standard is appropriate for
this industry. This size standard is above the standard that would have
been established in 1994 for this industry if the SBA had had the
authority to change it then based upon inflation since the time of the
previous adjustment in 1984.
Surveying Services (SIC Code 8713)
A size standard of $3.5 million is being proposed for the surveying
services industry. The average firm size of a surveying firm is
significantly below the average firm size of industries in the
nonmanufacturing anchor group, and supports a size standard of less
than $5 million. For the industry factor which looks at the
distribution of firms, firms at the three specified size classes for
surveying services obtained a significantly higher proportion of sales
than similar sized firms within the nonmanufacturing anchor group. This
factor also supports a size standard below $5 million. The industry
factor of payroll to sales reveals that the surveying services industry
is more labor intensive than the nonmanufacturing anchor group. This
factor indicates that start-up costs are relatively low and would
support a size standard of not more than $5.0 million. The four-firm
concentration ratio is below the ratio for the nonmanufacturing anchor
group, and supports a size standard at or below $5 million. Similar to
architectural services, there exists a wide disparity between the value
of Federal contracts awarded to small surveying firms and industry
sales produced by these firms. Small surveying firms account for
approximately 80 percent of total industry sales but received only 26.8
percent of Federal contracting dollars spent for surveying. The SBA
believes that due to the discrepancy between the small business share
of total industry sales and Federal Government contracts, an increase
to the current size standard is warranted, but one which is less than
the nonmanufacturing anchor size standard. Based on these
considerations, the SBA is proposing a size standard of $3.5 million.
This size standard is consistent with the standard that would have been
established in 1994 for this industry if the SBA had had the authority
to change it then based upon inflation since the time of the previous
adjustment in 1984.
Mapping Services (Part of SIC Code 7389)
The size standard of $3.5 million is being retained for mapping
services included within SIC code 7389, Business Services, Not
Elsewhere Classified. Surveying and mapping are closely related
activities, and the SBA believes that mapping services should have the
same size standard as proposed in this rule for surveying services. In
its revision to the definition of industries as published in April of
1997, the Office of Management and Budget recognized the closely
related nature of these two services by creating a new industry under
the North American Industry Classification System titled ``Surveying
and Mapping'' (see 62 FR 17288, April 9, 1997). This industry is
constructed by combining the mapping services activities within SIC
code 7389 with all of the surveying services activities within SIC code
8713. In addition, the SBA has found that Federal contracts for mapping
services have been classified under both SIC codes 7389 and 8713.
Between 1995 and 1996, 61 percent of mapping services contracts were
classified under SIC code 7389 and 39 percent were classified under SIC
code 8713. Since surveying and mapping services are closely related,
the SBA is proposing a common size standard for these two services.
Dominant in Field of Operation
Section 3(a) of the Small Business Act defines a small concern as
one that is independently owned and operated, not dominant in its field
of operation, and meets detailed definitions or standards established
by the Administrator of the SBA. In lieu of a separate small business
eligibility criterion, the SBA includes as part of its evaluation of a
size standard whether a concern at or below a recommended size standard
would be considered dominant in its field of operation. This assessment
generally takes into consideration the market share of firms at a
recommended size standard or other factors that may reveal if a firm
can exercise a major controlling influence on a national basis in which
significant numbers of business concerns are engaged.
The SBA has determined that at the recommended size standards of
$7.5 million for general engineering services, $5 million for
architectural services, and $3.5 million for surveying and mapping
industries, no firm at or below those levels would be of a sufficient
size to be dominant in its field of operation. Firms at the proposed
size standards generate less than 0.25 percent of total industry sales.
This level of market share effectively precludes any ability by a firm
to exert a controlling effect on the industry.
Alternative Size Standards
The SBA considered two alternative size standards for these
industries. The first alternative considered was retaining a common
size standard for all three industries. The general engineering,
architectural, and surveying services industries fall under a three-
digit industry group, and presently have a common size standard of $2.5
million. The $5 million anchor size standard would be an appropriate
standard if a common size standard were believed to be more suitable
for these three industries. When combined together, the industry
characteristics are similar to the average characteristics of the
nonmanufacturing anchor group. As
[[Page 5483]]
presented in the industry evaluations, significant differences exist
between the structure of the engineering industry, the architectural,
and the surveying and mapping industries. The SBA believes that these
differences are of significant magnitudes to warrant different size
standards among the three industries.
The second alternative considered was adjusting these size
standards only for inflation similar to the adjustment applied to most
receipts-based size standards in 1994 (61 FR 3280). Under this
alternative, the $2.5 million size standard would be increased to $3.5
million. The SBA believes, however, that these industries should be
thoroughly reviewed to determine the most appropriate size standard
rather than applying a simple inflation adjustment. Moreover, the SBA
believes that the unique history of these size standards and the
special attention they have received under the Small Business
Competitiveness Program compel a closer level of scrutiny for these
industry size standards than for most other industries.
The SBA welcomes public comments on the proposed size standards for
the general engineering, architectural, surveying and mapping services
industries. Comments on any of the alternatives to the proposal,
including those discussed above, should present the reasons why it is
preferable to the proposed size standards.
Compliance With Executive Orders 12612, 12788, and 12866, the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and the Paperwork
Reduction Act (44 U.S.C. Chapter 301 et seq.)
The SBA certifies that this rule, if adopted, would be a
significant rule within the meaning of Executive Order 12866.
Immediately below, the SBA has set forth an initial regulatory impact
analysis of this proposed rule.
(1) Description of Entities to Which the Rule Applies
SBA estimates that 2,215 additional firms would be considered small
as a result of this rule, if adopted. These firms would be eligible to
seek available SBA assistance provided they meet other program
requirements. Many of these firms probably had small business status in
1986 when these size standards were established at $2.5 million, but
have since lost eligibility because of general price increases. Of the
2,215 additional firms gaining eligibility, 1,747 operate in
engineering services, 428 operate in architectural services while 40
operate in surveying services. Firms becoming eligible for SBA
assistance as a result of this rule cumulatively generate $8.5 billion
in annual sales, while total sales in these industries are $77.5
billion. Of the $8.5 billion for newly eligible firms, $6.9 billion are
in engineering services, $1.4 billion are in architectural services and
$50 million are in surveying services.
(2) Description of Potential Benefits of the Rule
The most significant areas of benefits to businesses which could
obtain small business status as a result of adoption of this rule is
eligible for the Federal Government's procurement programs and the
SBA's Business Loan Program. The SBA estimates that firms gaining small
business status could potentially obtain Federal contracts worth $167
million per year under the Small Business Set-aside Program, the 8(a)
Program, or unrestricted contracts. Also, the additional competition
for many of these procurements would likely result in a lower price to
the Government for procurements which have been set aside, but the SBA
is not able to quantify this benefit. Under the SBA's 7(a) Guaranteed
Loan Program, it is estimated that $9.2 million in new loans could be
made to these newly defined small businesses and an additional $2.7
million in loans under the Certified Development Company (504) Program.
(3) Description of Potential Costs of the Rule
The changes in size standards as they affect Federal procurement is
not expected to add any significant costs to the Government. As a
matter of policy, procurements may be set aside for small business or
under the 8(a) Program only if awards are expected to be made at
reasonable prices. Similarly, the rule should not result in any added
costs associated with the 7(a) and 504 loan programs. The amount of
lending authority SBA can make or guarantee is established by
appropriation. The competitive effects of size standard revisions
differ from those normally associated with other regulations which
typically burden smaller firms to a greater degree than larger firms in
areas such as prices, costs, profits, growth, innovation and mergers.
The change to size standards is not anticipated to have any appreciable
affect on any of these factors, although small businesses or 8(a) firms
much smaller than the size standard for their industries may be less
successful in competing for some Federal procurement opportunities due
to the presence of larger, newly defined small businesses. On the other
hand, with more and larger small businesses competing for small
business set-aside and 8(a) procurements, contracting agencies are
likely to increase the overall number of contacting opportunities
available under these programs. In addition, the new size standards, if
adopted, would not impose a regulatory burden because they do not
regulate or control business behavior.
(4) Description of the Potential Net Benefits From the Rule
Based on the above discussion, SBA believes that, because the
potential costs of this rule are minimal, the potential net benefits
would be approximately equal to the total potential benefits. Most of
the impact of this rule will appear in the Federal procurement area.
(5) Description of Reasons Why This Action is Being Taken and
Objectives of Rule
The SBA has provided in the supplementary information a statement
of the reasons why these new size standards should be established and a
statement of the reasons for and objectives of this rule.
For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,
the SBA certifies that this rule would not impose new reporting or
recordkeeping requirements, other than those required of SBA. For
purposes of Executive Order 12612, the SBA certifies that this rule
does not have any federalism implications warranting the preparation of
a Federalism Assessment. For purposes of Executive Order 12778, the SBA
certifies that this rule is drafted, to the extent practicable, in
accordance with the standards set forth in section 2 of this order.
List of Subjects in 13 CFR Part 121
Government procurement, Government property, Grant programs--
business. Loan programs--business. Small business.
Accordingly, part 121 of 13 CFR is proposed to be amended as
follows:
PART 121--[AMENDED]
1. The authority citation of part 121 continues to read as follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), and 644(c), and
662(5).
Sec. 121.201 [Amended]
2. In Sec. 121.201, in the table ``Size Standards by SIC
Industry,'' under the heading DIVISION I--SERVICES, is amended by
revising the entries corresponding to 8711, 8712, and 8713 to read as
follows:
[[Page 5484]]
8711 Engineering Services.................................. $7.5
Military and Aerospace Equipment and Military Weapons.. 20.0
Contracts and Subcontracts for Engineering Services
Awarded Under the National Energy Policy Act of 1992.. 20.0
Marine Engineering and Naval Architecture.............. 13.5
8712 Architectural Services (Other than Naval)............. 5.0
8713 Surveying Services.................................... 3.5
Dated: December 23, 1997.
Aida Alvarez,
Administrator.
[FR Doc. 98-2609 Filed 2-2-98; 8:45 am]
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