[Federal Register Volume 67, Number 206 (Thursday, October 24, 2002)]
[Rules and Regulations]
[Pages 65285-65290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27060]



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  Federal Register / Vol. 67, No. 206 / Thursday, October 24, 2002 / 
Rules and Regulations  

[[Page 65285]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AE56


Small Business Size Standards; Inflation Adjustment to Size 
Standards.

AGENCY: Small Business Administration (SBA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The U.S. Small Business Administration (SBA) is adopting as 
final the size standards promulgated as an interim final rule effective 
on February 22, 2002. This rule, like the interim final rule, adjusts 
the monetary-based size standards (e.g., receipts, net income, net 
worth, and assets) by 15.8 percent to account for the effects of 
inflation since 1994. SBA is also adopting a provision in its 
regulations that will require, at least once every five years, an 
assessment of the impact of inflation on monetary-based size standards. 
This periodic review will generally ensure that monetary-based 
standards are current with inflation trends.

DATES: This final rule is effective on October 24, 2002.

FOR FURTHER INFORMATION CONTACT: Diane Heal, Office of Size Standards, 
(202) 205-6618.

SUPPLEMENTARY INFORMATION:

Inflation Adjustment

    On January 23, 2002 (67 FR 3041), SBA issued an interim final rule, 
effective February 22, 2002, that increased our monetary-based size 
standards by 15.8 percent in order to restore eligibility to firms that 
may have lost small business status due solely to the effects of 
inflation since the last inflation adjustment in 1994 (see 67 FR 3041 
for a description of methodology adjusting size standards for 
inflation). Small business size standards are based on the six-digit 
industry codes of the North American Industry Classification System 
(NAICS). In addition, SBA has several programs that have their own size 
standards (e.g., Certified Development Company Program, Surety Bond 
Guarantee Program, Sale of Government Property, etc.). The size 
standards that SBA changed are those that are receipts-based and those 
based upon other monetary measures of business size. Employee-based, 
production-based, and other size standards established by legislation 
are unaffected by inflation, and are not part of this rulemaking. 
However, some receipt-based standards that were recently increased were 
not adjusted as the inflation effect had been factored into the new 
size standard. In the interim final rule, SBA did not apply the 
inflation increase to the $1 million size standard for Travel Agencies 
and the $1.5 million size standard for Real Estate Agencies because it 
believed that the increase would be too small to serve any meaningful 
purpose.
    This final rule adopts the changes promulgated in the interim final 
rule.

Inflation Review

    In the interim final rule, SBA added a provision to its size 
standards regulations requiring that at least once every five years it 
will assess the impact of inflation on its monetary-based size 
standards. This provision provides assurances to the public that SBA is 
monitoring inflation and is making a decision whether or not to adjust 
size standards within a reasonable period of time since its last 
inflation adjustment. If SBA decides not to make an inflation 
adjustment after a review, it will continue to monitor inflation on an 
annual basis until such time an adjustment is made. SBA received 
favorable comments on this provision and adopts the language contained 
in the interim final rule without change.

Discussion of Comments on the Interim Final Rule

    SBA received 32 comments on the interim final rule's inflation 
adjustment and SBA's provision requiring it to assess at least every 
five years the impact of inflation on its size standards. Five comments 
were received from two members of Congress, seven comments came from 
four industry associations, while the remainder of the comments were 
received from businesses operating in various industries.
    SBA received no comments opposing the 15.8 percent inflation 
adjustment. Five comments supported the provision requiring SBA to 
assess every five years the impact of inflation on its size standards. 
One comment recommended that SBA perform a biennial inflation review of 
its size standards. Six comments were received on the Travel Agencies 
industry size standard. Two comments addressed issues concerning the 
way inflation was calculated. Three comments addressed a concern about 
the listing of size standards in the interim final rule. The remaining 
comments addressed size standards issues pertaining to specific 
industries. Below, we address each significant issue raised by these 
comments and explain our reason for adopting or rejecting the comment's 
recommendation.

Travel Agencies Be Included in Inflation Adjustment

    SBA received five comments supporting an inflationary increase for 
the travel agencies size standard. SBA had decided that it would not 
include travel agencies in its inflation adjustment because a 15.8 
percent would be too small to warrant an increase to a size standard of 
only $1 million. These commenters believe that the travel agencies size 
standard should be increased by the 15.8 percent inflation adjustment 
at this time. They emphasized the fact that revenues for travel 
agencies are counted differently than other industry revenues. Travel 
agencies are allowed to exclude funds received in trust for an 
unaffiliated third party, such as bookings or sales subject to 
commissions. One commenter pointed out that $1 million in commissions 
equates to approximately $20 million in sales and a 15.8 percent 
inflationary increase would equate to $23 million in sales. In 
addition, SBA received one comment requesting that the size standard 
for travel agencies be increased beyond the amount for inflation.
    At the time of the interim final rule SBA was reviewing the Travel 
Agencies size standard. We subsequently proposed and adopted a $3 
million size standard for travel agencies (see 67 FR 38186, dated May 
31, 2002, effective July 1, 2002).

[[Page 65286]]

Biennial Inflation Review

    One commenter believed that a biennial review of size standards 
would be more timely to reflect changes in business conditions. SBA is 
not adopting this comment. Under the adopted provision, if SBA finds 
that inflation increased significantly before the required five-year 
review, it has the authority to initiate an adjustment to the monetary 
size standards. SBA believes that a policy of adjusting for inflation 
on a more frequent interval than it has in the past is appropriate, but 
that it must retain the discretion to decide when inflation adjustments 
need to be made in light of inflation trends and other factors that 
influence the decision on size standards.

Projected Inflation Adjustment Approach

    One commenter requested SBA consider a projected or forward 
adjustment approach that would take into account ``what the average 
increase would be at the mid-point for the next five year adjustment 
period.'' The commenter believed by adopting this approach SBA would 
always have current monetary-based size standards and eliminate the 
``catch up'' approach with 5-year adjustments. SBA does not agree that 
this additional adjustment is better than its new policy of reviewing 
and making inflation adjustments on a regular basis. Furthermore, 
forecasting future inflation involves much uncertainty. Past inflation 
trends have proven not to be accurate measures of future inflation, 
especially in times of extremely high or low rates of inflation.

The Use of the Personal Consumption Expenditures Chain-Type Price Index

    To measure the rate of inflation, one commenter recommended that 
SBA use the ``Personal Consumption Expenditures (PCE) Chain-Type Price 
Index'' instead of the ``Gross Domestic Product (GDP) Chain-Type Price 
Index.'' This commenter believes that ``Due to recent world events 
causing a downturn for the United States economy * * * the use of a 
Chain-Type Price Index for GDP does not properly reflect industry 
differences from industry-to-industry.''
    SBA does not adopt this comment. As discussed in the preamble of 
the interim final rule, SBA decided to convert from the ``Implicit 
Price Deflator for GDP'' to the GDP Chain-Type Price Index for its 
measure for the inflation adjustment. This index is a broader measure 
of inflation for the entire economy than the PCE Chain-Type Price 
Index. The recommended PCE Chain-Type Price Index measures primarily 
purchases by U.S. individuals from private businesses and excludes the 
purchases of business and government. Furthermore, both indices track 
inflation very closely. Between the fourth quarter of 1993 to the 
fourth quarter of 2001, the two indices were only three-tenths of one 
percent different. This minor difference has no effect on the adopted 
size standards.

Application of New Size Standards

    One commenter requested that under the effective date, SBA change 
the word ``issued'' to ``closing'' in the statement ``For the purposes 
of Federal procurements, this rule applies to solicitations, except for 
noncompetitive Section 8(a) contracts, issued (emphasis added) on or 
after February 22, 2002.'' The commenter stated that ``the rule as now 
written, creates a situation where an entity that qualifies as a small 
business on February 22, 2002, as intended by the rule, would be 
precluded from pursuing a previously issued, but still open 
solicitation, for which that businesses would otherwise be qualified.''
    SBA does not adopt this comment. When contracting officers plan 
their procurements they explore the possibility of setting aside their 
solicitation for small business programs based upon the number of small 
businesses, at that time, able to submit an acceptable proposal or bid. 
Potential bidders then decide to pursue a contracting opportunity based 
partly on the potential competition. SBA is concerned that there would 
be legal and administrative burdens placed on contracting agencies if 
it were to make this change. Any change to the size standard of a 
pending solicitation must depend on the specific circumstances of the 
solicitation. SBA believes that it is the contracting officer's 
decision whether to amend a solicitation to incorporate the new size 
standards rather than SBA impose that requirement.

Listing of Size Standards

    SBA received three comments concerning the industries listed in the 
interim final rule. One commenter recommended that SBA publish the 
entire table of size standards. Two commenters recommended that we 
publish all the size standards under NAICS code 562910, Remediation 
Services. These commenters believed that the publication of only the 
Remediation Services size standard that increased to $12 million and 
not the segmented size standard of 500 employees for Environmental 
Remediation Services caused confusion within the industry. SBA also 
received several phone calls regarding this NAICS code because many 
firms and contracting officers erroneously viewed SBA's action as 
eliminating the segmented size standard for Environmental Remediation 
Services. SBA has not eliminated the 500-employee size standard for 
Environmental Remediation Services.
    The interim final rule listed only those NAICS industries and size 
standards changed by the inflation adjustment. SBA recognizes that the 
interim final rule may have led to the misinterpretation of its size 
standards. SBA considered publishing the size standards for all 
industries within the NAICS sectors in which one or more of the 
monetary-based size standards are revised. However, on September 6, 
2002, SBA published the entire table of size standards (see 67 FR 
55944), which included the inflation adjustment, as part of a 
correction to a proposed rule (see 67 FR 52633, dated August 13, 2002) 
to adopt the use of the Office of Management and Budget's 2002 
revisions to the NAICS (this rule was adopted on August 13, 2002 (67 FR 
52597) and was effective on October 1, 2002). This published listing 
should eliminate any misunderstanding of which size standards changed 
as a result of the inflation increase. A complete listing of current 
size standards is available at SBA's Size Standards' Web site at http://www.sba.gov/size, or by calling (202) 205-6618 for a copy of the table 
of size standards.

More Than an Inflation Adjustment for Specific Industries and Programs

    SBA received 10 comments requesting additional increases beyond the 
inflation adjustment to SBA's Surety Bond program and seven industries: 
Accounting Services, Architectural and Engineering Services, Mapping 
Services, Construction Inspection and Management Services, Facility 
Support Services, Refuse Collection, and Automobile Dealers. The 
purpose of this final rule and the interim final rule is to adjust 
monetary-based size standards for the effects of inflation. Any 
additional change to a size standard based on other considerations must 
be assessed specifically through a separate rulemaking action. SBA is 
currently reviewing the size standards for the Surety Bond program, 
Facility Management Services, Refuse Collection, Accounting Services, 
and Automobile Dealers to determine if a change is warranted. SBA 
recently reviewed, with significant public input, and increased the 
size standards for

[[Page 65287]]

Architectural and Engineering Services and, Mapping Services (64 FR 
26275, dated May 14, 1999), and Construction and Inspection Management 
Services (65 FR 37689, dated June 16, 2000). SBA does not plan on 
revisiting these industries unless significant changes occur in these 
industries.

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

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a ``significant'' regulatory action for purposes of 
Executive Order 12866. Size standards determine which businesses are 
eligible for Federal small business programs. More information follows 
in our Regulatory Impact Analysis and Final Regulatory Flexibility 
Analysis. This is not a major rule under the Congressional Review Act, 
5 U.S.C. 800. For the purpose of the Paperwork Reduction Act, 44 U.S.C. 
Ch. 35, SBA has determined 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 has determined that 
this rule does not have any federalism implications warranting the 
preparation of a Federalism Assessment. For purposes of Executive Order 
12988, SBA has determined that this rule is drafted, to the extent 
practicable, in accordance with the standards set forth in that order. 
Our Regulatory Impact Analysis follows.

Regulatory Impact Analysis

i. 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. For those size 
standards based on monetary measures of size (receipts, net worth, 
assets, etc.), SBA has made periodic adjustments to restore the real 
value of the size standard eroded by increases in the general level of 
prices.

ii. What Are the Potential Benefits and Costs of This Regulatory 
Action?

    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, 8,760 additional firms 
generating $55 billion percent of sales, or 29.3 percent of sales, will 
obtain small business status and become eligible for these programs. 
These include SBA's financial assistance programs, economic injury 
disaster loans and Federal procurement preference programs for small 
businesses, 8(a) firms, small disadvantaged businesses (SDB), 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 
SDB price adjustment. Through the assistance of these programs, small 
businesses may benefit by becoming more knowledgeable, stable, and 
competitive businesses. Other Federal agencies also use SBA size 
standards for a variety of regulatory and program purposes. SBA does 
not have information on each of these programs to evaluate the impact 
of size standard changes. However, in cases where an SBA's size 
standard is not appropriate, an agency may establish its own size 
standard with the approval of the SBA Administrator (see 13 CFR 
121.801).
    The benefits of a size standard increase to a more appropriate 
level would accrue to three groups: (1) Businesses that benefit by 
gaining small business status from the higher size standards that also 
use small business assistance programs, (2) growing small businesses 
that may exceed the current size standards in the near future and who 
will retain small business status from the higher size standard, and 
(3) Federal agencies that award contracts under procurement programs 
that require small business status.
    Newly defined small businesses would benefit from the SBA's 
programs, 7(a) Guaranteed Loan Program and Certified Development 
Company (504) Program. SBA estimates that approximately $17 million in 
new Federal loan guarantees could be made to these newly defined small 
businesses. This represents 0.19% of the $9 billion in loans that were 
guaranteed by the SBA under these two financial programs to firms in 
industries with monetary-bases size standards.
    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 $39.2 million of additional 
Federal contracts may be awarded to businesses becoming newly 
designated small businesses. The percentage increase of annual sales 
attributed to these new small businesses is estimated at seven-tenths 
of one percent. SBA applied this factor to the fiscal year 2000 total 
small business prime contractor initial awards which totaled $5.6 
billion [$5.6B x .007 (.7 of 1%) = $39.2M].
    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 business may create an incentive for Federal agencies to 
set aside more procurements creating greater opportunities for all 
small businesses. Large businesses with small business subcontracting 
goals may also benefit from a larger pool of small businesses by 
enabling them to better achieve their subcontracting goals and 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.
    To the extent that up to 8,760 additional firms could become active 
in Federal small business 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. With greater number of businesses defined as small, Federal 
agencies may choose to set aside more contracts for competition among 
small

[[Page 65288]]

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 through HUBZone and SDB 
price adjustments. 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), 
HUBZone Programs only if awards are expected to be made at fair and 
reasonable prices.
    The proposed size standard may have distributional effects among 
large and small businesses. Although the actual outcome of the gains 
and losses among small and large businesses cannot be estimated with 
certainty, several trends are likely to emerge. First, there may be a 
transfer of some Federal contracts to small businesses from large 
businesses. Large businesses may have fewer Federal contracting 
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 a large 
business since those two categories of small businesses are eligible 
for price adjustments 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 were willing and able to sell to the Federal Government. The 
potential distributional impacts of these transfers may not 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.
    The inflation adjustment to SBA's monetary-based size standards 
operators is consistent with SBA's statutory mandate to assist small 
business. This regulatory action also promotes the Administration's 
objectives. One of SBA's goals in support of the Administration's 
objectives is to help individual small businesses succeed through fair 
and equitable access to capital and credit, Government contracts, and 
management and technical assistance. Reviewing and modifying size 
standards when appropriate ensures that intended beneficiaries have 
access to small business programs designed to assist them. Size 
standards do not interfere with State, local, and tribal governments in 
the exercise of their government functions. In a few cases, State and 
local governments have voluntarily adopted SBA's size standards for 
their programs to eliminate the need to establish an administrative 
mechanism to develop their own size standards.

Final Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this rule may have a 
significant impact on a substantial number of small entities. 
Immediately below, SBA sets forth a final regulatory flexibility 
analysis (FRFA) of this rule addressing the need for, and objectives 
of, the rule; the significant issues raised by commenters to the 
initial regulatory flexibility analysis; SBA's description and estimate 
of the number of small entities to which the rule will apply; the 
projected reporting, record keeping, and other compliance requirements 
of the rule; and alternatives to the final rule considered by SBA that 
minimize the impact on small businesses.

(1) What Is the Need for, and Objectives of, This Rule?

    A review of the latest available inflation indices show inflation 
has increased a sufficient amount to warrant an adjustment to the 
current receipt-based size standards. As discussed in the supplemental 
information, the objective of this rule is to restore the small 
business eligibility of businesses who have grown above the size 
standard due to inflation rather than to an expansion of business 
activity.

(2) What Significant Issues Were Raised By the Public Comments in 
Response to the Initial Regulatory Flexibility Analysis (IFRA)?

    SBA received no comments in response to the IRFA of the Interim 
Final Rule.

(3) What Is SBA's Description and Estimate of the Number of Small 
Entities to Which the Rule Will Apply?

    SBA estimates that there will be approximately 8,760 newly 
designated small business, distributed as follows by NAICS Sectors and 
Subsectors:

             Estimate of Firms Gaining Small Business Status
------------------------------------------------------------------------
                                                            Associated
                                             Number of     annual sales
                                               firms         (billion)
------------------------------------------------------------------------
Retail
    Sectors 44-45.......................           2,800             $17
Services
    Sectors 51, 52, 54, 55, 61, 62, 71,            4,100              22
     72, 81, and Subsectors 531, 532,
     561................................
Finance, Insurance and Real Estate
    Sectors 52-53.......................             650               3
Transportation & Utilities,
    Sectors 22 & 48.....................             450               3
Construction and Refuse
    Sector 23 & Subsector 562...........             760              10
                                         -----------------
        Total...........................           8,760             55
------------------------------------------------------------------------
Source: 1997 Economic Census, U.S. Census Bureau, Special Tabulation for
  SBA. Sales estimates restated to 2000 dollars.

    The percentage increase in the number of small businesses that will 
result from this rule, compared to the existing base of small 
businesses, is estimated to be about two-tenths of one percent. The 
special tabulation of the 1997 Economic Census for SBA reports 
5,082,970 total firms in the U.S. economy as defined by this census. We 
estimate that 98.4 percent of all businesses in the U.S. are currently 
defined as small under the existing size

[[Page 65289]]

standards. Under the rule, this will increase to 98.6 percent. The 
percentage increase of annual sales in the U.S. economy attributed to 
these new small businesses is likely to be approximately seven-tenths 
of one percent. This will be applied to a base of 28.6 percent. Thus 
under this proposal the percent of sales attributed to firms defined as 
small businesses in the U.S. is likely to increase to 29.3 percent.
    Currently, 5,003,048 businesses are small. Less than five percent 
of these businesses utilize SBA programs. For example, in SBA's PRO-Net 
(a SBA database of small businesses interested in contracting with the 
Federal Government) 195,000 firms are currently registered. In fiscal 
year 2001, 43,817 firms received 7(a) guaranteed loans. Thus, with this 
inflation adjustment, the likely impact of this rule would be limited 
to the 8,760 firms that will gain small business status as a result of 
this rule. This figure is based on the U.S. Census Bureau's special 
tabulation of the 1997 Economic Census for SBA's Office of Size 
Standards, using size distribution of firms' tables. The following 
table shows these data.

                         Table 1.--Industry Data
------------------------------------------------------------------------
                          Category                              Firms
------------------------------------------------------------------------
Total Businesses...........................................    5,082,970
Current Small Businesses (all sectors).....................    5,003,048
Current Small Businesses (affected sectors)................    5,001,642
Small Businesses with the adoption of this rule............    5,011,808
Small Businesses Registered in PRO-Net.....................      195,000
Small Businesses with 7(a) Loans...........................       43,817
------------------------------------------------------------------------

    The 8,760 firms gaining small business status will become eligible 
to seek available SBA assistance provided that they meet other program 
requirements.
    In addition, SBA cannot ascertain the entire impact of this 
inflation adjustment on current small businesses as many Federal, 
state, and local agencies and authorities use SBA's size standards for 
their programs and SBA does not have information on each of these uses 
to evaluate the impact of the size standards changes.

(4) Will This Rule Impose Any Additional Reporting or Recordkeeping 
Requirements on Small Businesses?

    This rule does not impose any new information collection 
requirements from SBA which require approval by OMB under the Paperwork 
Reduction Act of 1980, 44 U.S.C. 3501-3520. 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.

(5) What Are the Steps SBA Has Taken To Minimize the Significant 
Economic Impact on Small Businesses?

    Most of the economic impact on small businesses will be positive. 
The most significant benefits to businesses that would obtain small 
business status as a result of adoption of this final rule are (1) 
eligibility for the Federal Government's procurement preference 
programs for small businesses, 8(a) firms, small disadvantaged 
businesses, and businesses located in Historically Underutilized 
Businesses Zones; and (2) the eligibility for SBA's financial 
assistance programs such as 7(a), 504, and Economic Injury Disaster 
Loan (EIDL) Assistance programs.
    SBA estimates that firms gaining small business status could 
potentially obtain Federal contracts worth $39.2 million per year under 
the small business set-aside program, the 8(a) program or unrestricted 
contracts. This represents 0.7 of 1 percent of the $5.6 billion the 
Federal government awarded to small business prime contractors in 
FY2000 for initial awards. We view the additional amount of contract 
activity as the potential amount of transfer from non-small to newly 
designated small firms. In many cases, businesses that had been small 
but outgrew the size standards within the past seven years due to 
inflation will again be considered small businesses. This does not 
represent the creation of new contracting activity by the Federal 
government, merely a possible reallocation or transfer to different 
size firms.
    Under SBA's 7(a) Guaranteed Loan program and Certified Development 
Company (504) program, SBA estimates that approximately $17 million in 
new Federal loan guarantees could be made to these newly defined small 
businesses. This represents 0.19 percent of the $9 billion in loans 
that were guaranteed by the SBA under these two financial programs to 
firms in industries with monetary-based size standards. Considering 
that the average size of firms gaining small business status will be $6 
million, demand for assistance will likely be less than the overall 
participation rate for SBA loans among firms of all sizes. In any given 
year less than 1 percent of all small businesses receive SBA financing. 
Since larger firms are less likely to seek SBA financial assistance, we 
believe that no more than one-half of 1 percent of the newly designated 
small business would seek SBA assistance. SBA estimates that 
approximately 45 out of the 8,760 firms would seek SBA financing. SBA 
financial assistance recipients of this size on average obtain 
assistance worth $375,000, so the impact in terms of new loans 
generated is estimated to be $17 million.
    The adopted inflation adjustment to size standards will minimize 
the impact on small businesses in two ways. First, small and more 
periodic inflation adjustments than SBA had adopted in the past will 
help to retain small business status for many businesses and limit the 
number of businesses whose status changes from small to nonsmall back 
to small. Second, more frequent inflation adjustments avoid the 
situation where existing small businesses find themselves immediately 
competing against a large number of newly defined small businesses. For 
example, SBA estimated that 20,000 businesses gained small business 
status from the 1994 inflation compared to the 8,760 businesses by this 
final rule's adjustment.

(6) Alternatives

(a) What Are the Legal Policies or Factual Reasons for Selecting the 
Alternative Adopted in the Final Rule?
    As stated in the Small Business Act 15. U.S.C. 631 and 13 CFR part 
121, SBA establishes size standards based on industry characteristics 
and for non-manufacturing concerns on the basis of the annual average 
gross receipts of a business concern over a period of three years. As 
these referenced concerns' receipts are subject to the effects of 
inflation, SBA must make an adjustment of 15.8 percent in order to 
restore eligibility to firms that may have lost small business status 
solely due to the effect of inflation.
(b) What Alternatives Did SBA Reject?
    SBA considered two alternatives to this rule. First, to wait until 
inflation has increased a greater amount before proposing an adjustment 
to receipt-based size standards. Previous inflation adjustments ranged 
between 48 percent to 100 percent. SBA believes that more frequent 
adjustments are necessary since smaller amounts of inflation can change 
the small business eligibility of a large number of businesses.
    Second, SBA considered a policy of automatically adjusting size 
standards for inflation on a fixed schedule. SBA

[[Page 65290]]

believes inflation must be closely monitored to assess the impact of 
inflation on size standards. Automatic adjustments may lead to 
inappropriate changes to size standards and prevent the Agency from 
taking into consideration other factors that bear on the review of size 
standards, such as changes in industry structure or Administration 
policies. Furthermore, an automatic adjustment could require SBA to 
make insignificant changes (i.e., 1 percent) or to wait a longer period 
of time than necessary to adjust size standards if inflation rapidly 
increases.

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, the interim rule amending 13 CFR part 121, which was 
published at 67 FR 3041 on January 23, 2002, is adopted as a final 
rule.

    Dated: October 10, 2002.
Hector V. Barreto,
Administrator.
[FR Doc. 02-27060 Filed 10-23-02; 8:45 am]
BILLING CODE 8025-01-P