[Federal Register Volume 67, Number 68 (Tuesday, April 9, 2002)]
[Proposed Rules]
[Pages 17020-17027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8359]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE78


Small Business Size Standards; Testing Laboratories

AGENCY: Small Business Administration (SBA).

ACTION: Proposed rule.

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SUMMARY: The Small Business Administration (SBA) is proposing to 
increase the size standard for the Testing Laboratories industry (North 
American Industry Classification System (NAICS) code 541380) to $10 
million in average annual receipts. The current size standard for this 
industry is $6 million in average annual receipts. The proposed 
revision is being made to better define the size of businesses in this 
industry that SBA believes should be eligible for Federal small 
business assistance programs.

DATES: Comments must be submitted on or before June 10, 2002.

ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator 
for Size Standards, 409 3rd Street, SW, Mail Code 6530, Washington, DC 
20416; or via email to [email protected]. Upon request, SBA will 
make all public comments available.

FOR FURTHER INFORMATION CONTACT: Robert N. Ray, Office of Size 
Standards, (202) 205-6618.

SUPPLEMENTARY INFORMATION: The Small Business Administration (SBA) has 
received requests from Testing Laboratories to review its $6 million 
size standard. These firms believe that a size standard increase is 
warranted in light of the high level capacities and skills that Federal 
agencies have recently required among their vendors that specialize in 
environmental and radiochemical testing. They believe that the minimum 
government requirements may have raised the costs of doing business in 
this industry to the point that the pool of eligible small businesses 
in this activity has seriously declined. If this trend continues, it is 
argued, Federal agencies could be hampered in using government 
preference programs for small business. Below is a discussion of SBA's 
size standards methodology and the analysis leading to the proposal to 
increase the Testing Laboratories size standard to $10 million.
    (Effective February 22, 2002, the Testing Laboratories size 
standard increased from $5 million to $6 million as part of an 
inflation adjustment to SBA's monetary size standards (see 67 FR 3041, 
dated January 23, 2002. This rule proposes a further increase to the 
size standard based on an analysis of the characteristics of businesses 
in the Testing Laboratories industry.)
    Size Standards Methodology: Congress has granted SBA discretion to 
establish detailed size standards. SBA's Standard Operating Procedure 
(SOP) 90 01 3, ``Size Determination Program,'' available on SBA's web 
site at http:/www.sba.gov/library/soproom.html, sets out four 
categories for establishing and evaluating size standards: (1) The 
structure of the industry and its various economic characteristics, (2) 
SBA program objectives and the impact of different size standards on 
these programs, (3) whether a size standard successfully excludes those 
businesses which are dominant in the industry, and (4) other factors if 
applicable. Other factors, including the impact on other agencies' 
programs, may come to the attention of SBA during the public comment 
period or from SBA's own research on the industry. No formula or 
weighting has been adopted so that the factors may be evaluated in the 
context of a specific industry. Below is a discussion of SBA's analysis 
of the economic characteristics of an industry, the impact of a size 
standard on SBA programs, and the evaluation of whether a firm at or 
below a size standard could be considered dominant in the industry 
under review.
    Industry Analysis: The Small Business Act, 15 U.S.C. 632(a)(3), 
requires that size standards vary by industry to the extent necessary 
to reflect differing industry characteristics

[[Page 17021]]

(Section 3(a)(3)). SBA has in place two ``base or anchor size 
standards'' that apply to most industries. SBA established 500 
employees as the anchor size standard for the manufacturing industries 
at SBA's inception in 1953, and shortly thereafter established a $1 
million size standard for the nonmanufacturing industries. The 
receipts-based anchor size standard for the nonmanufacturing industries 
was periodically adjusted for inflation so that, currently, the anchor 
size standard for the nonmanufacturing industries is $6 million. Anchor 
size standards are presumed to be appropriate for an industry unless 
its characteristics indicate that larger firms have a much greater 
significance within that industry than for the ``typical industry.''
    When evaluating a size standard, the characteristics of the 
specific industry under review are compared to the characteristics of a 
group of industries, referred to as a comparison group. A comparison 
group is a large number of industries grouped together to represent the 
typical industry. It can be comprised of all industries, all 
manufacturing industries, all industries with receipt-based size 
standards, or some other logical grouping. If the characteristics of a 
specific industry are similar to the average characteristics of the 
comparison group, then the anchor size standard is considered 
appropriate for the industry. If the specific industry's 
characteristics are significantly different from the characteristics of 
the comparison group, a size standard higher or, in rare cases, lower 
than the anchor size standard may be considered appropriate. The larger 
the differences between the specific industry's characteristics and the 
comparison group, the larger the difference between the appropriate 
industry size standard and the anchor size standard. Only when all or 
most of the industry characteristics are significantly smaller than the 
average characteristics of the comparison group, or other industry 
considerations strongly suggest the anchor size standard would be an 
unreasonably high size standard for the industry under review, will SBA 
adopt a size standard below the anchor size standard.
    In 13 CFR 121.102 (a) and (b), evaluation factors are listed which 
are the primary factors describing the structural characteristics of an 
industry--average firm size, distribution of firms by size, start-up 
costs, and industry competition. The analysis also examines the 
possible impact of a size standard revision on SBA's programs as an 
evaluation factor. SBA generally considers these five factors to be the 
most important evaluation factors in establishing or revising a size 
standard for an industry. However, it will also consider and evaluate 
other information that it believes relevant to the decision on a size 
standard as the situation warrants for a particular industry. These can 
include the impact of a revision on other agencies' programs. Public 
comments submitted on proposed size standards are also an important 
source of additional information that SBA closely reviews before making 
a final decision on a size standard. Below is a brief description of 
each of the five evaluation factors.
    1. Average firm size is simply total industry receipts (or number 
of employees) divided by the number of firms in the industry. If the 
average firm size of an industry is significantly higher than the 
average firm size of a comparison industry group, this fact would be 
viewed as supporting a size standard higher than the anchor size 
standard. Conversely, if the industry's average firm size is similar to 
or significantly lower than that of the comparison industry group, it 
would be a basis to adopt the anchor size standard or, in rare cases, a 
lower size standard.
    2. The distribution of firms by size examines the proportion of 
industry receipts, employment or other economic activity accounted for 
by firms of different sizes in an industry. If the preponderance of an 
industry's economic activity is by smaller firms, this tends to support 
adopting the anchor size standard. The opposite is the case for an 
industry in which the distribution of firms indicates that economic 
activity is concentrated among the largest firms in an industry. In 
this rule, SBA is comparing the size of firm within an industry to the 
size of firm in the comparison group at which predetermined percentages 
of receipts are generated by firms smaller than a particular size firm. 
For example, for Testing Laboratories, 50% of total industry receipts 
are generated by firms of $9.3 million in receipts and less. This 
contrasts with the comparison group (composed of industries with the 
nonmanufacturing anchor size standard of $6 million) in which firms of 
$5.8 million or less in receipts generated 50% of total industry 
receipts. Viewed in isolation, this significantly higher figure for 
Testing Laboratories suggests that a higher size standard than the 
nonmanufacturing anchor size standard may be warranted. Other size 
distribution comparisons in the industry analysis include 40%, 60%, and 
70%, as well as the 50% comparison discussed above.
    3. Start-up costs affect a firm's initial size because entrants 
into an industry must have sufficient capital to start and maintain a 
viable business. To the extent that firms entering into an industry 
have greater financial requirements than firms in other industries, SBA 
is justified in considering a higher size standard. In lieu of direct 
data on start-up costs, SBA is using a special measure to assess the 
financial burden for entry-level firms. SBA is using nonpayroll costs 
per establishment as a proxy measure for start-up costs associated with 
capital investment requirements. This is derived by first calculating 
the percent of receipts in an industry that are either retained or 
expended on costs other than payroll costs. (The figure comprising the 
numerator of this percentage is mostly composed of capitalization 
costs, overhead costs, materials costs, and the costs of goods sold or 
inventoried.) This percentage is then applied to average establishment 
receipts to arrive at nonpayroll costs per establishment (an 
establishment is a business entity operating at a single location). An 
industry with a significantly higher level of nonpayroll costs per 
establishment than that of the comparison group is likely to have 
higher start-up costs that would tend to support a size standard higher 
than the anchor size standard. Conversely, if the industry showed a 
significantly lower nonpayroll costs per establishment when compared to 
the comparison group, the anchor size standard would be considered the 
appropriate size standard.
    4. Industry competition is assessed by measuring the proportion or 
share of industry receipts obtained by firms that are among the largest 
firms in an industry. In this proposed rule, SBA compared the 
proportion of industry receipts generated by the four largest firms in 
the industry--generally referred to as the ``four-firm concentration 
ratio''--with the average four-firm concentration ratio for industries 
in the comparison groups. If a significant proportion of economic 
activity within the industry is concentrated among a few relatively 
large producers, SBA tends to set a size standard relatively higher 
than the anchor size standard to assist firms in a broader size range 
compete with firms that are larger and more dominant in the industry. 
In general, however, SBA does not consider this to be an important 
factor in assessing a size standard if the four-firm concentration 
ratio falls below 40% for an industry under review, while its

[[Page 17022]]

comparison groups also average less than 40%.
    5. Competition for Federal procurements and SBA Financial 
Assistance. SBA also evaluates the possible impact of a size standard 
on its programs to determine whether small businesses defined under the 
existing size standard are receiving a reasonable level of assistance. 
This assessment most often focuses on the proportion or share of 
Federal contract dollars awarded to small businesses in the industry in 
question. 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 is the justification for a 
size standard higher than the existing one.
    As another factor to evaluate the impact of a proposed size 
standard on SBA programs, the volume of guaranteed loans within an 
industry and the size of firms obtaining those loans is assessed to 
determine whether the current size standard may restrict the level of 
financial assistance to firms in that industry. If small businesses 
receive ample assistance through these programs, or if the financial 
assistance is provided mainly to small businesses much lower than the 
size standard, an increase to the size standard (especially, if it is 
already above the anchor size standard) may not be appropriate.
    Evaluation of Industry Size Standard: The two tables below show the 
characteristics for the Testing Laboratories industry and for the 
comparison group. The primary comparison group is comprised of all 
industries with a $6 million receipts-based size standard (referred to 
as the nonmanufacturing anchor group). Since SBA's size standards 
analysis is assessing whether the Testing Laboratories size standard 
should be higher than the nonmanufacturing anchor size standard, this 
is the most logical set of industries to group together for the 
industry analysis. Data on a second comparison group is also shown. 
This group consists of all industries in NAICS Sector 54, Professional, 
Scientific, and Technical Services--the NAICS Sector of which Testing 
Laboratories is a part. The data on this comparison group provide an 
additional perspective on the size of firms in related industries and 
their industry structure. SBA examined economic data on these 
industries from a special tabulation of the 1997 Economic Census 
prepared under contract by the U.S. Bureau of the Census. SBA also 
examined Federal contract award data for fiscal years 1998-2000 from 
the U.S. General Services Administration's Federal Procurement Data 
Center.
    Industry Structure Consideration: Table 1 below examines the size 
distribution of Testing Laboratories. For this factor, SBA is 
evaluating the size of firm that accounts for predetermined percentages 
of total industry receipts (40%, 50%, 60%, and 70%). The table shows 
firms up to a specific size that, along with smaller firms, account for 
a specific percentage of total industry receipts. For example, Testing 
Laboratories of $4.6 million or less in receipts obtained 40% of total 
industry receipts. Within the nonmanufacturing anchor group, firms of 
$3.2 million or less in receipts obtained 40% of total industry 
receipts in the average industry, while in NAICS sector 54, firms of 
$2.3 million or less in receipts obtained 40% of total industry 
receipts.

 Table 1.--Size Distributions of Firms in the Testing Laboratories Industry, Nonmanufacturing Anchor Group, and
                                                 NAICS Sector 54
                                         [Data in Thousands of Dollars]
----------------------------------------------------------------------------------------------------------------
                                                   Size of firm    Size of firm    Size of firm    Size of firm
                    Category                          at  40%         at  50%         at  60%         at  70%
----------------------------------------------------------------------------------------------------------------
Testing Laboratories............................          $4,600           9,262          18,726          33,867
Nonmanufacturing Anchor Group...................           3,206           5,821          11,857          27,957
NAICS Sector 54.................................           2,262           4,683           9,668          31,904
----------------------------------------------------------------------------------------------------------------

    These data suggest that a size standard nearly double the $6 
million size standard may be appropriate for the industry of Testing 
Laboratories. At the given coverage levels the size of firm for the 
Testing Laboratories industry is significantly larger than in the two 
comparison groups. The size of firms for the Testing Laboratories 
industry is more than 40% larger than in the Nonmanufacturing Anchor 
comparison group, and about twice as large as the average industry in 
NAICS Sector 54 for most of the distribution percentages.
    Table 2 lists the other four evaluation factors for the Testing 
Laboratories industry and the comparison groups. These include 
comparisons of average firm size, the measurement of start-up costs as 
measured by nonpayroll receipts per establishment, and the four-firm 
concentration ratio.

   Table 2.--Industry Characteristics of the Testing Laboratories Industry, Nonmanufacturing Anchor Group, and
                                                 NAICS Sector 54
----------------------------------------------------------------------------------------------------------------
                                                         Average firm size          Non payroll      Four firm
                                                 --------------------------------  receipts per    concentration
                    Category                         Receipts                      establishment    ratio  (in
                                                   (millions $)      Employees      (million $)      percent)
----------------------------------------------------------------------------------------------------------------
Testing Laboratories............................            1.56            19.9            0.68            12.1
Nonmanufacturing Anchor Group...................            0.95            10.6            0.56            14.4
NAICS Sector....................................              54            0.77             7.7            0.45
----------------------------------------------------------------------------------------------------------------

    For Testing Laboratories, its average firm size in receipts is one 
and one-half times larger than the average firm size in the 
Nonmanufacturing Anchor comparison group, and twice that of the NAICS 
Sector 54 industries. Moreover, its average firm size in employees is 
two to three times the average sizes of these two comparison groups. 
This factor is sufficiently higher than the comparison groups to 
support a size standard appreciably above or double the $6 million size 
standard. Its nonpayroll receipts per establishment ratio indicator, a 
measure of capital

[[Page 17023]]

requirements to enter an industry, is also somewhat higher than the 
anchor comparison group, and about one and one-half times the size of 
the NAICS Sector 54 group of industries. This factor indicates that a 
size standard slightly above the $6 million size standard may be 
appropriate. Its four-firm concentration ratio, however, is relatively 
low, indicating that the industry is not dominated by large businesses. 
This is the only industry structure parameter not pointing to the need 
for a higher size standard for Testing Laboratories.
    SBA Program Considerations: SBA also reviews its size standards in 
relationship to its programs. Since SBA is reviewing the Testing 
Laboratories Industry's size standard because of concerns about the 
application of the size standard to Federal procurement, this proposed 
rule gives more consideration to the pattern of Federal contract awards 
than to the level of financial assistance to small businesses to assess 
whether its size standard should be revised. SBA provides a relatively 
small amount of financial assistance to Testing Laboratories. In fiscal 
year 2000, 66 loans totaling $21 million were guaranteed to Testing 
Laboratories. Most of these loans were to labs with less than $1 
million in receipts. It's unlikely that an increase to the size 
standard will have much impact on the financial programs and, 
consequently, this factor is not part of the assessment of the size 
standard.
    In the case of Federal procurement, the share of Federal contracts 
awarded to small Testing Laboratories supports an increase to the 
current size standard (see Table 3). Small Testing Laboratories 
received only 8.4% of the dollar value of Federal contracts awarded 
during fiscal years 1998 to 2000. While there are no NAICS procurement 
data available for the receipt-based size standards group, or for the 
54 group, SBA does have data for total small business awards in which 
all industries are summed and combined. In fiscal years 1998-2000, 
18.7% of the total value of all Federal prime contracts were awarded to 
small firms, a figure more than twice the share of small firms in the 
Testing Laboratories Industry. In addition, this share is 
disproportionally small when compared with the amount of total industry 
receipts generated by small Testing Laboratories. Although the Census 
Bureau data indicate that small Testing Laboratories account for more 
than 40% of industry receipts, they obtained only 8.4% of Federal 
contracts during fiscal years 1998-2000. These figures suggest that the 
Federal contract requirements are different from those of the private 
marketplace, favoring, in general, larger firms with greater experience 
and sophistication. These results strongly reinforce the industry 
structure factors in arguing for a higher size standard for Testing 
Laboratories.

                     Table 3.--Small Business Prime Contract Awards, Fiscal Years 1998-2000
                                         [Data in thousands of dollars]
----------------------------------------------------------------------------------------------------------------
            Category                    FY 1998             FY 1999             FY 2000       Sum of three years
----------------------------------------------------------------------------------------------------------------
Total Awards....................  $182,255.7          $183,579.4          $203,533.9          $569,369.0
Small Business Awards...........  $33,746.7           $34,482.9           $38,260.3           $106,490.0
Percent to Small Business.......  18.5%               18.8%               18.8%               18.7%
Testing Laboratories Awards.....  $861.6              $628.0              $84.7               $1,574.3
Small Testing Laboratories        $44.1               $45.3               $42.1               $131.7
 Awards.
Percent to Small Testing          5.1%                7.2%                49.7%               8.4%
 Laboratories.
----------------------------------------------------------------------------------------------------------------
Note: Data for FY 2000 for Testing Laboratories are not representative of most years due to deobligations of
  $135 million from procurements initiated in previous years.

    Overview: Based on the analysis of each evaluation factor, SBA is 
proposing a $10 million size standard. Four of the five evaluation 
factors clearly support a size standard ranging from slightly above to 
double the $6 million nonmanufacturing anchor size standard. The low 
amount of participation of small businesses in Federal government 
procurement, however, is of special concern and suggests, as the 
requestors had pointed out, that Federal contract requirements may 
indeed influence the size of Testing Laboratories that possesses the 
equipment and qualifications to perform on Federal analytical testing 
contracts. After considering all factors, SBA believes that a $10 
million size standard is a reasonable size standard for the Testing 
Laboratories industry and will help small businesses in this industry 
to compete for Federal contracts without including businesses that are 
so large that they could harm the ability of much smaller-sized small 
businesses to compete successfully for Federal contracts.
    Dominant in Field of Operation: Section 3(a) of the Small Business 
Act defines a small concern as one that is (1) independently owned and 
operated, (2) not dominant in its field of operation and (3) within 
detailed definitions or size standards established by the SBA 
Administrator. SBA considers as part of its evaluation of a size 
standard whether a business concern at or below a proposed size 
standard would be considered dominant in its field of operation. This 
assessment generally considers the market share of firms at the 
proposed or final size standard, or other factors that may show whether 
a firm can exercise a major controlling influence on a national basis 
in which significant numbers of business concerns are engaged.
    SBA has determined that no firm at or below the proposed size 
standard for the Testing Laboratories industry would be of a sufficient 
size to dominate its field of operation. The largest firm at the 
proposed size standard level generates less than 0.16% of total 
industry receipts. This level of market share effectively precludes any 
ability for a firm at or below the proposed size standard to exert a 
controlling effect on this industry. Alternative Size Standards: SBA 
considered as an alternative size standard to the proposed $10 million, 
a more modest increase to $7.5 million, and a larger increase to $12.5 
million. SBA, however, decided not to propose the more moderate 
increase of $7.5 million because it believes that the very low share of 
Federal procurements to small Testing Laboratories indicates the need 
for a higher size standard to include those Testing Laboratories that 
can meet and perform on many Federal analytical testing contracts. SBA 
also decided not to propose a larger increase to $12.5 million based on 
the fact that two of the five factors reviewed indicated a size 
standard at, or only slightly above, the

[[Page 17024]]

$6 million nonmanufacturing anchor size standard. SBA believes that the 
evaluation factors should be virtually unanimous for an increase of 
this magnitude. While the industry factors pointed to a higher size 
standard for this industry, they were not strong enough to support a 
size standard of $12.5 million--more than twice the present size 
standard. However, the factors did point to a size standard of $10 
million. The three factors pointing to a $10 million size standard--the 
size distribution of firms, average firm size, and the Federal 
procurement share of small firms--are the factors that SBA believes are 
most important when analyzing a size standard. (The non-payroll 
receipts per establishment is only a proxy measure of capitalization, 
and the four firm concentration measure, generally, is so low outside 
of the manufacturing and utility industries that it usually has little 
effect on the analysis.) Thus, with three out of five factors pointing 
to a higher size standard, and the fact that these factors are more 
important than the other factors, SBA believes that a size standard of 
$10 million is warranted.
    SBA welcomes public comments on its proposed size standard for the 
Testing Laboratories industry. Comments supporting an alternative to 
the proposal, including the option of retaining the size standard at $6 
million discussed above, should explain why the alternative would be 
preferable to the proposed size standard.

Compliance With Executive Orders 12866, 12988, and 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35) and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

    The Office of Management and Budget (OMB) has determined that this 
proposed rule constitutes a ``significant'' regulatory action under 
Executive Order 12866. SBA's regulatory analysis is set forth below.

Regulatory Impact Analysis

A. General Considerations

1. Is There a Need for the Regulatory Action?
    SBA is chartered to aid and assist small businesses through a 
variety of financial, procurement, business development, and advocacy 
programs. To effectively assist intended beneficiaries of these 
programs, SBA must establish distinct definitions of which businesses 
are deemed small businesses. The Small Business Act (15 U.S.C. 632(a)) 
delegates to the SBA Administrator the responsibility for establishing 
small business definitions. It also requires that small business 
definitions vary to reflect industry differences. SBA believes that an 
adjustment in the size standard of the Testing Laboratories industry is 
needed to better reflect the industrial structure of this industry.
2. Alternatives
    There are no viable alternatives to establishing size standards to 
define a small business for Federal small business programs. The 
purpose of this rule is to better define the size of firms eligible for 
SBA assistance.
3 What is the baseline?
    The baseline in this rule is the coverage of businesses whose size 
is at or below SBA's size standard of $6 million for this industry. A 
special tabulation of the 1997 Economic Census prepared for SBA reports 
that 3,762 firms active in this industry are defined as small out of 
4,126 firms in the industry. These account for 91.2% of total firms in 
the industry. These firms generate $2.66 billion of the $6.44 billion 
produced in the industry. SBA estimates that 98.4% of all businesses in 
the U.S. are currently defined as small under the existing size 
standards and they account for 28.6% of industry sales.

B. Benefit Estimates

    The most significant benefit to businesses obtaining small business 
status as a result of this rule is eligibility for Federal small 
business assistance programs. Under this rule, 120 additional firms 
will obtain small business status and become eligible for these 
programs. These include SBA's financial assistance programs and Federal 
procurement preference programs for small businesses, 8(a) firms, small 
disadvantaged businesses, small businesses located in Historically 
Underutilized Business Zones (HUBZone), women-owned small businesses, 
and veteran-owned and service disabled veteran-owned small businesses, 
as well as those awarded through full and open competition after 
application of the HUBZone or small disadvantaged business price 
evaluation preference or adjustment. Other Federal agencies use SBA 
size standards for a variety of regulatory and program purposes. SBA 
does not have information on each of these uses to evaluate the impact 
of size standards changes. However, in cases where SBA size standards 
are not appropriate, an agency may establish its own size standards 
with the approval of the SBA Administrator (see 13 CFR 121.801). 
Through the assistance of these programs, small businesses may benefit 
by becoming more knowledgeable, stable, and competitive businesses.
    The benefits of a size standard increase to a more appropriate 
level would accrue to three groups. First, businesses that benefit by 
gaining small business status from the proposed size standards and use 
small business assistance programs. Second, growing small businesses 
that may exceed the current size standards in the near future and who 
will retain small business status from the proposed size standards. 
Third, Federal agencies that award contracts under procurement programs 
that require small business status.
    Newly defined small businesses would benefit from the SBA's 
financial programs, in particular its 7(a) Guaranteed Loan Program and 
Certified Development Company (504) Program. SBA estimates that 
approximately $2.1 million in new Federal loan guarantees could be made 
to these newly defined small businesses. This represents 9.8% of the 
$21 million in loans that were guaranteed by the SBA under these two 
financial programs to firms in the Testing Laboratories industry in FY 
2000. Because of the size of the loan guarantees, most loans are made 
to small businesses well below the size standard. Thus, increasing the 
size standard will likely result in only a small increase in small 
business guaranteed loans to businesses in this industry, and the $2.1 
million estimated figure may overstate the actual impact.
    The newly defined small businesses would also benefit from SBA's 
economic injury disaster loan program. Since this program is contingent 
upon the occurrence and severity of a disaster, no meaningful estimate 
of benefits can be projected.
    SBA estimates that approximately $51 million per year of additional 
Federal prime contracts may be awarded to businesses becoming newly 
designated small businesses in the Testing Laboratories industry. This 
represents 9.8% of the $525 million that the Federal government awarded 
in the average year in this industry during fiscal years 1998-2000.
    Federal agencies may benefit from the higher size standards if the 
newly defined and expanding small businesses compete for more set-aside 
procurements. The larger base of small businesses would likely increase 
competition and lower the prices on set-aside procurements. A large 
base of small businesses may create an incentive for Federal agencies 
to set aside more procurements, thus creating greater opportunities for 
all small businesses. Nonsmall businesses with

[[Page 17025]]

small business subcontracting goals may also benefit from a larger pool 
of small businesses by enabling them to better achieve their 
subcontracting goals at lower prices. No estimate of cost savings from 
these contracting decisions can be made since data are not available to 
directly measure price or competitive trends on Federal contracts.

C. Costs Estimates

    To the extent that up to 120 additional firms could become active 
in Government programs, this may entail some additional administrative 
costs to the Federal government associated with additional bidders for 
Federal small business procurement programs, additional firms seeking 
SBA guaranteed lending programs, and additional firms eligible for 
enrollment in SBA's PRO-Net data base program. Among businesses in this 
group seeking SBA assistance, there will be some additional costs 
associated with compliance and verification of small business status 
and protests of small business status. These costs are likely to 
generate minimal incremental administrative costs since administrative 
mechanisms are currently in place to handle these administrative 
requirements.
    The costs to the Federal government may be higher on some Federal 
contracts as a result of this rule. With greater numbers of businesses 
defined as small, Federal agencies may choose to set aside more 
contracts for competition among small businesses rather than using full 
and open competition. The movement from unrestricted to set aside is 
likely to result in competition among fewer bidders for a contract. 
Also, higher costs may result if additional full and open contracts are 
awarded to HUBZone and SDB businesses as a result of a price evaluation 
preference. The additional costs associated with fewer bidders, 
however, are likely to be minor since, as a matter of policy, 
procurements may be set aside for small businesses or under the 8(a), 
and HUBZone Programs only if awards are expected to be made at fair and 
reasonable prices.

D. Other Considerations Including Distributional Effects, Equity 
Considerations and Uncertainty

    The proposed size standard may have distributional effects among 
large and small businesses. Although the actual outcome of the gains 
and loses among small and large businesses cannot be estimated with 
certainty, several trends are likely to emerge. First, a transfer of 
some Federal contracts to small businesses from large businesses. Large 
businesses may have fewer Federal contract opportunities as Federal 
agencies decide to set aside more Federal procurements for small 
businesses. Also, some Federal contracts may be awarded to HUBZone or 
small disadvantaged businesses instead of large businesses since those 
two categories of small businesses are eligible for price evaluation 
preferences for contracts competed on a full and open basis. Similarly, 
currently defined small businesses may obtain fewer Federal contacts 
due to the increased competition from more businesses defined as small. 
This transfer may be offset by a greater number of Federal procurements 
set aside for all small businesses. The potential transfer of contracts 
away from large and currently defined small businesses would be limited 
by the number of newly defined and expanding small businesses that were 
willing and able to sell to the Federal Government. The potential 
distributional impacts of these transfers cannot be estimated with any 
degree of precision since the data on the size of business receiving a 
Federal contract are limited to identifying small or other-than-small 
businesses.
    SBA has determined that this proposed rule, if adopted, may have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 
601 et seq. Immediately below is an initial regulatory flexibility 
analysis (IRFA) of this proposed rule addressing the following 
questions: (1) What is the need for and objective of the rule, (2) what 
is SBA's description and estimate of the number of small entities to 
which the rule will apply, (3) what is the projected reporting, record 
keeping, and other compliance requirements of the rule, and (4) what 
are the relevant Federal rules which may duplicate, overlap or conflict 
with the proposed rule.
(1) What Is the Need for and Objective of the Rule?
    SBA believes that this revision to the size standard for Testing 
Laboratories more appropriately defines the size of businesses in this 
industry that should be eligible for Federal small business assistance 
programs. A review of the latest available data supports a change to 
the current size standard.
(2) What Is SBA's Description and Estimate of the Number of Small 
Entities to Which the Rule Will Apply?
    SBA estimates that 120 additional businesses out of 4,126 
businesses in the industry would be considered small as a result of 
this rule, if adopted. The number of small businesses would increase 
from 3,762 firms to 3,882. These businesses would be eligible to seek 
available SBA assistance provided that they meet other program 
requirements. Businesses becoming newly eligible for SBA assistance as 
a result of this rule, if finalized, cumulatively generate $635 million 
in this industry. The amount of receipts by small firms would increase 
from $2.7 billion to $3.3 billion out of a total of $6.4 billion in 
receipts. The small business coverage in this industry would increase 
by 9.8% of total receipts. This figure of 9.8% is used to estimate the 
potential economic impacts of this rule as they relate to Federal 
programs that are discussed below.
    Description of Potential Benefits of the Rule: The most significant 
benefit to businesses obtaining small business status as a result of 
this rule is their eligibility for Federal small business assistance 
programs. These include SBA's financial assistance programs and Federal 
procurement preference programs for small businesses, 8(a) firms, small 
disadvantaged businesses, and small businesses located in Historically 
Underutilized Business Zones (HUBZone).
    SBA estimates that firms gaining small business status could 
potentially obtain additional Federal contracts worth $51 million per 
year under the small business set-aside program, the 8(a) and HUBZone 
programs or unrestricted contracts. This represents 9.8% of the $525 
million that the Federal government awarded per year in this industry 
during fiscal years 1998-2000. The added competition for many of these 
procurements also would likely result in a lower price to the 
government for procurements set aside for small businesses, but SBA is 
not able to quantify this benefit.
    Under SBA's 7(a) Guaranteed Loan Program and Certified Development 
Company (504) Program, SBA estimates that an additional $2.1 million in 
new Federal loan guarantees could be made to these newly defined small 
businesses. This represents 9.8% of the $21 million in loans that were 
guaranteed y SBA under these two financial programs for firms in the 
Testing Laboratories Industry in FY 2000. Because of the size of the 
loan guarantees, most loans are made to businesses well below the size 
standard. Thus, increasing the size standard will likely result in only 
a small increase in small business guaranteed loans to businesses in 
this industry, and the $2.1 million estimated figure may overstate the 
actual impact.

[[Page 17026]]

    We view the additional amount of contract activity as the potential 
amount of transfer from non-small to newly designated small firms. This 
does not represent the creation of new contracting activity by the 
Federal government, merely a reallocation or transfer to different 
sized firms.
    Description of Potential Costs of the Rule: The changes in size 
standards as they affect Federal procurement are 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) and 
HUBZone Programs 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. A change to a 
size standard is not anticipated to have any appreciable effect on any 
of these factors, although small businesses, 8(a) firms, or small 
disadvantaged businesses much smaller than the size standard for their 
industry 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 larger small businesses 
competing for small business set-aside and 8(a) procurements, Federal 
agencies are likely to increase the overall number of contracting 
opportunities available under these programs, and this could result in 
greater opportunities for businesses much smaller than the size 
standard.
    Under this rule, there will be 120 additional firms that are 
considered small and eligible for SBA preference programs. To the 
extent that these firms are active in Government programs, this will 
entail some additional administrative costs to the Federal government 
associated with additional bidders for SBA's procurement programs, 
additional firms seeking SBA guaranteed lending programs, and 
additional firms eligible for enrollment in SBA's Pro Net program. 
Among firms in this group seeking SBA assistance, there will be some 
additional costs associated with compliance and verification. These 
costs are likely to be small.
(3) What Is the Projected Reporting, Record Keeping, and Other 
Compliance Requirements of the Rule and an Estimate of the Classes of 
Small Entities Which Will Be Subject to the Requirements?
    A new size standard does not impose any additional reporting, 
record keeping or compliance requirements on small entities. Increasing 
size standards expands access to SBA programs that assist small 
businesses, but does not impose a regulatory burden as they neither 
regulate nor control business behavior.
(4) What Are the Relevant Federal Rules Which May Duplicate, Overlap or 
Conflict With the Proposed Rule?
    This proposed rule overlaps other Federal rules that use SBA's size 
standards to define a small business. Under section 632(a)(2)(C) of the 
Small Business Act, unless specifically authorized by statute, Federal 
agencies must use SBA's size standards to define a small business. In 
1995, SBA published in the Federal Register a list of statutory and 
regulatory size standards that identified the application of SBA's size 
standards as well as other size standards used by Federal agencies (60 
FR 57988-57991, dated November 24, 1995). SBA is not aware of any 
Federal rule that would duplicate or conflict with establishing size 
standards.
    SBA cannot estimate the impact of a size standard change on each 
and every Federal program that uses its size standards. In cases where 
an SBA's size standard is not appropriate, the Small Business Act and 
SBA's regulations allow Federal agencies to develop different size 
standards with the approval of the SBA Administrator (13 CFR 121.902). 
For purposes of a regulatory flexibility analysis, agencies must 
consult with SBA's Office of Advocacy when developing different size 
standards for their programs.
    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA certifies that this rule would not impose new reporting or record 
keeping requirements, other than those required of SBA. For purposes of 
Executive Order 13132, SBA certifies that this rule does not have any 
federalism implications warranting the preparation of a Federalism 
Assessment. For purposes of Executive Order 12988, SBA certifies that 
this rule is drafted, to the extent practicable, in accordance with the 
standards set forth in that order.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Loan programs--business, 
Small businesses.

    Accordingly, part 121 of 13 CFR is proposed to be amended as 
follows:

PART 121--[AMENDED]

    1. The authority citation for part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c) and 
662(5) and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.

    2. In Sec. 121.201, in the table ``Small Business Size Standards by 
NAICS Industry'', under the heading Subsector 541--Professional, 
Scientific and Technical Services, revise the entry for 541380 to read 
as follows:


Sec. 121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *

             Small Business Size Standards by NAICS Industry
------------------------------------------------------------------------
                                                       Size standards in
                                     Description           number of
          NAICS codes           (N.E.C.=Not Elsewhere     employees or
                                     Classified)          millions of
                                                            dollars
------------------------------------------------------------------------
 
*            *            *            *            *            *
                                      *
       Sector 54--Professional, Scientific and Technical Services
     Subsector 541--Professional, Scientific and Technical Services
------------------------------------------------------------------------
 
*            *            *            *            *            *
                                      *
541380........................  Testing Laboratories.              $10.0

[[Page 17027]]

 
 
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    Dated: January 8, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-8359 Filed 4-8-02; 8:45 am]
BILLING CODE 8025-01-P