[Federal Register Volume 84, Number 234 (Thursday, December 5, 2019)]
[Rules and Regulations]
[Pages 66561-66579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26041]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AH16
Small Business Size Standards: Calculation of Annual Average
Receipts
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is
modifying its method for calculating average annual receipts used to
prescribe size standards for small businesses. Specifically, in
accordance with the Small Business Runway Extension Act of 2018, SBA is
changing its regulations on the calculation of average annual receipts
for all of SBA's receipts-based size standards, and for other agencies'
proposed receipts-based size standards, from a 3-year averaging period
to a 5-year averaging period, outside of the SBA Business Loan and
Disaster Loan Programs. SBA intends to seek comment on the Business
Loan and Disaster Loan Programs in a proposed rule through a separate
rulemaking. For all other programs, SBA adopts a transition period
through January 6, 2022, during which firms may choose between using a
3-year averaging period and a 5-year averaging period.
DATES: This rule is effective January 6, 2020.
FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Ph.D., Chief, Office
of Size Standards, (202) 205-6618 or [email protected].
SUPPLEMENTARY INFORMATION:
Background Information
Public Law 115-324 (the ``Small Business Runway Extension Act of
2018'') amended section 3(a)(2)(C)(ii)(II) of the Small Business Act,
15 U.S.C. 632(a)(2)(C)(ii)(II), to modify the requirements for proposed
small business size standards prescribed by an agency without separate
statutory authority to issue size standards.
Under section 3(a)(2)(C)(ii) of the Small Business Act, as amended,
an agency without separate statutory authority to issue size standards
must satisfy three requirements to prescribe a size standard. First,
the agency must propose the size standard with an opportunity for
public notice and comment. Second, the agency must provide for
determining the size of a manufacturing concern based on a 12-month
average of the concern's employment, the size of a services concern
based on a 5-year average of gross receipts, and the size of another
business concern on the basis of data of not less than 3 years. Third,
the agency must obtain approval of the contemplated size standard from
the SBA Administrator.
In contrast to agencies subject to section 3(a)(2)(C), SBA has
independent statutory authority to issue size standards. Under section
3(a)(2)(A) of the Small Business Act, the SBA Administrator may specify
detailed definitions or standards by which a business concern may be
determined to be a small business concern for the purposes of SBA's
programs or any other Federal Government program. Section 3(a)(2)(B) of
the Small Business Act further provides that such definitions may
utilize the number of employees, dollar volume of business, net worth,
net income, a combination thereof, or other appropriate factors. To
determine eligibility for Federal small business assistance, SBA
establishes detailed size definitions for small businesses (usually
referred to as ``size standards'') that vary from industry to industry
reflecting differences among the various industries. SBA typically uses
two primary measures of business size for size standards purposes: (i)
Average annual gross receipts for businesses in services, retail trade,
agricultural, and construction industries, and (ii) average number of
employees for businesses in all manufacturing, most mining and
utilities industries, and some transportation, information and research
and development (R&D) industries. SBA uses financial assets for certain
financial industries and refining capacity, in addition to employees,
for the petroleum refining industry to measure business size standards
purposes.
The SBA's size standards are used to establish eligibility for a
variety of Federal small business assistance programs, including for
Federal Government contracting and business development programs
designed to assist small businesses in obtaining Federal contracts and
for SBA's loan guarantee programs, which provide access to capital for
small businesses that are unable to qualify for and receive
conventional loans elsewhere. The Federal Government contracting
programs that use SBA's size standards include the SBA's 8(a) Business
Development (BD) program, the Historically Underutilized Business Zones
(HUBZone) program, the Service Disabled Veteran-Owned Small Business
(SDVOSB) program, the Women-Owned Small Business (WOSB) program, and
the Economically Disadvantaged Women-Owned Small Business (EDWOSB)
program. SBA's Small Business Investment Company (SBIC), Certified
Development Company (CDC/504), and 7(a) loan programs use either the
industry-based size standards or tangible net worth and net income
based alternative size standards to determine eligibility for those
programs.
SBA has long interpreted section 3(a)(2)(C) of the Small Business
Act as not applying to SBA's size standards issued under section
3(a)(2)(A). In the preambles to the proposed and final
[[Page 66562]]
rules implementing 3(a)(2)(C), SBA explained that the Small Business
Act requires that other Federal agencies either use SBA's size
standards or use their own size standards that meet the requirements as
set forth in that section. 65 FR 4176 (Jan. 26, 2000) and 67 FR 13714
(March 26, 2002). In the final implementation in 2002, SBA interpreted
section 3(a)(2)(C) as applying only to non-SBA agencies, stating,
``Unless a statute specifies size standards for an agency's program or
gives an agency direct authority to establish size standards, the
agency must use the applicable size standards established by SBA.''
However, the Act allows an agency to ``prescribe a size standard for
categorizing a business concern as a small business concern (see sec.
3(a)(2)(C) of the Act) provided that the contemplated size standard
meets certain criteria, and the agency obtains approval of the SBA
Administrator.'' 67 FR 13714. For further details on section 3(a)(2)(C)
not applying to SBA's size standards, see the proposed rule (84 FR
29399).
Nevertheless, to promote consistency government-wide on small
business size standards, on June 24, 2019 (84 FR 29399), SBA issued for
comments a proposed rule to change its method for calculating average
annual receipts for all SBA's receipts-based size standards and other
agencies' proposed receipts-based size standards for firms in services
industries from a 3-year averaging period to a 5-year averaging period.
SBA determined that it would be confusing for a service-industry
business concern to use a 3-year average for SBA's receipts-based size
standards and switch to a 5-year average for another agency's receipts-
based size standards. Similarly, it would be confusing to apply SBA's
size standards for a business that is engaged in both service- and non-
service industries to use a 5-year average for determining small
business status in a service industry but switch to a 3-year average
for a non-service industry. Thus, although section 3(a)(2)(C), as
amended, permits another agency to use a 3-year average outside of the
service industries, SBA is adopting a 5-year averaging period for
calculating the annual receipts of businesses for all industries that
are subject to its receipts-based size standards, including the retail
trade, agricultural, and construction industries.
In accordance with Public Law 115-324, SBA proposed to change the
averaging period for calculating annual receipts for other agencies'
receipts-based size standards for firms in services-industries from 3
years to 5 years and to maintain the 3-year averaging period for
calculating the size for non-services firms. To promote consistency and
avoid confusion, in this final rule, SBA is adopting the same 5-year
averaging period for all receipts-based size standards issued by other
agencies as well. More than 40 comments to the proposed rule, as
discussed below, expressed support for adopting the same 5-year
averaging period for all SBA receipts-based size standards. Of those, 3
also recommended using the same averaging period for all receipts-based
size standards prescribed by other agencies.
This final rule carries out the intent of Public Law 115-324, as
expressed in the Report of the House Committee on Small Business, H.
Rpt. 115-939, with respect to Federal procurement opportunities. The
Committee report states that, to help advanced small businesses
successfully navigate the middle market as they reach their small
business size thresholds, the bill would lengthen the time in which the
SBA measures size through revenue, from the average of the past 3 years
to the average of the past 5 years. The Committee report states that
the bill would reduce the impact on small businesses from rapid growth
in some years which would result in spikes in revenue that may
prematurely eject a small business out of their small business status.
The Committee report adds that the bill would allow small businesses at
every level more time to grow and develop their competitiveness and
infrastructure, before entering the open marketplace. The bill, as the
Committee report states, would also protect Federal investment in SBA's
small business procurement programs by increasing chances of success in
the middle market for newly graduated firms, resulting in enhanced
competition against large prime contractors.
As stated in the Committee report, during the period when annual
revenues are rising, the 5-year average will generally be lower than
the 3-year average, thereby allowing: (i) Mid-sized businesses who have
just exceeded size standards to regain their small business status, and
(ii) advanced small businesses close to exceeding the size standard to
retain their small business status for a longer period. In the proposed
rule, SBA noted that, when annual revenues are declining, the 5-year
average may be higher than the 3-year average. This would cause small
businesses near the size thresholds to lose their small business status
sooner under the 5-year average than under the 3-year average. This is
more likely to happen during economic downturns. Businesses that lose
their small business status under the 5-year average may be
disadvantaged further because they may have to wait several years more
to regain their small business status, as compared to under a 3-year
average. The proposed rule added that newly established firms that have
been in business for less than 5 years will receive no benefit from a
change to a 5-year average. A firm that has been in business for less
than the averaging period simply annualizes the receipts from its full
existence.
Additionally, SBA also stated in the proposed rule that by enabling
mid-size businesses to regain small business status and by lengthening
the small business status of advanced and successful larger small
businesses, the longer averaging period may disadvantage smaller small
businesses in more need of Federal assistance than their more advanced
and larger counterparts in competing for Federal opportunities. Similar
to concerns from mid-size businesses that they lack necessary
resources, past performance qualifications, and expertise to be able to
compete against very large businesses in the full and open market, SBA
has also received concerns from smaller small businesses that they also
lack resources, past performance qualifications, and expertise to be
able to compete against more resourceful, qualified, and experienced
larger small businesses for Federal opportunities for small businesses.
In its June 24, 2019 proposed rule, SBA sought comments on its
proposal to change the averaging period for the calculation of average
annual receipts for all receipts-based size standards from 3 years to 5
years.
1. SBA sought feedback, along with supporting facts and analyses,
on whether the Agency should calculate average annual receipts over 5
years for all industries subject to receipts-based size standards and
on whether it should use a 5-year average annual receipts for
businesses in services industries only and continue using a 3-year
average annual receipts for other businesses. SBA was concerned that
the latter option may create confusion for both businesses in reporting
their size based on average annual receipts and contracting personnel
in verifying the size of bidders to Federal contracts.
2. SBA sought input on how the use of average annual receipts over
5 years instead of 3 years would impact both smaller small businesses
and more advanced, larger small businesses in terms of getting access
to Federal opportunities for small businesses.
[[Page 66563]]
Additionally, SBA requested comments on its clarification of how
annual receipts should be calculated in connection with the acquisition
or sale of a division. The proposed rule provided that the annual
receipts of a concern would not be adjusted where the concern sells or
acquires a segregable division during the applicable period of
measurement. This is distinct from how SBA treats the sale or
acquisition of a subsidiary that is a separate legal entity.
In this final rule, SBA adopts the changes as stated in the
proposed rule, with two modifications. First, in response to comments,
SBA is not including the 7(a) Loan Program, the Microloan Program, the
Intermediary Lending Pilot Program, and the Development Company Loan
Program (collectively, the ``Business Loan Programs'') in this present
change. SBA also is not including Physical Disaster Business Loans,
Economic Injury Disaster Loans, Military Reservist Economic Injury
Disaster Loans, and Immediate Disaster Assistance Program loans
(collectively, the ``Disaster Loan Programs''). At a later date, SBA
will issue a proposed rule to seek additional input to assess the
impact of any changes to the Business Loan and Disaster Loan Programs.
Second, for all other SBA programs, including the Federal procurement
programs, SBA adopts a two-year transition period through January 6,
2022. During the transition period, a firm may choose between
calculating receipts using a 3-year average or a 5-year average.
Discussion of Comments
SBA received a total of 217 comments to the proposed rule, of which
5 were not pertinent to the scope of the proposed rule. Of the 212
comments that were pertinent, 140 commenters (including more than 10
trade associations, small and mid-size business groups, and small
business advocacy organizations) fully supported the proposed rule; 5
comments supported the change to a 5-year averaging period but opposed
SBA's proposal not to adjust receipts for the sale or acquisition of a
segregable division; 28 comments did not oppose the change to a 5-year
averaging period but opposed the use of 5 years of tax returns to
analyze any loan program requirement other than size; 37 comments
opposed the change to a 5-year averaging period; and 2 comments could
not be categorized as either supporting or opposing the proposed rule.
All of these comments are available at www.regulations.gov (RIN 3245-
AH16), are summarized and discussed below in terms of various
categories of comments, and are accompanied by SBA's responses.
Comments on Using a 5-Year Averaging Period for All Receipts-Based Size
Standards
SBA requested comments on whether it should use a 5-year averaging
period for all of its receipts-based standards (i.e., for both services
industries and non-services industries) or only for services
industries. Forty-one commenters responded to this issue, all of which
supported using the 5-year averaging period for all SBA's receipt-based
size standards. Three of those comments also supported using the 5-year
averaging period for other agencies' size standards for non-services
industries that are subject to receipts-based size standards.
Commenters expressed support for expanding the 5-year averaging
period to all receipt-based size standards for a variety of reasons.
For example, one organization agreed with SBA that using different
formulas for calculating size in different industries may create
confusion, adding that ``using different formulas could incentivize
NAICS appeals as contractors jockey for a code that not only uses their
preferred size standard, but also their preferred number of years in
the calculation of size.'' Similarly, another organization supported
the expansion of the 5-year averaging period for all receipts-based
size standards because maintaining a separate averaging period for non-
services industries would lead to confusion for small firms in that
some firms would be small under one NAICS code but other-than-small
under another NAICS code with the same or higher size standard. The
organization explained that maintaining a 3-year averaging period for
non-services industries would ``leave companies that have multiple
capabilities to potentially be small under their services NAICS code,
but not under other NAICS of work they perform.'' Another organization
supported applying the 5-year averaging period to all receipts-based
size standards because it would ``reduce the burden on small businesses
in determining which size standard to apply to a given procurement.''
However, some commenters opposed the move to a 5-year averaging
period on the grounds that this would increase paperwork and compliance
burden on lenders and borrowers of the SBA's loans. These commenters
suggested, as discussed below, that SBA retain the current 3-year
averaging period for calculating annual revenues for services firms for
the SBA's financial assistance programs, if SBA decides to adopt the
proposed 5-year averaging period elsewhere.
SBA's response:
SBA agrees with the commenters that, in applying SBA's size
standards, separating out services industry firms from non-services
firms would cause confusion and create a greater compliance burden on
firms that participate in both services industries and non-services
industries. SBA also agrees that using a 5-year averaging period for
services industries and a 3-year averaging period for non-services
industries can lead to an inconsistent result of making a business
small in one NAICS code and other than small in another NAICS code with
a same or higher size standard. SBA also finds that it will be equally
confusing to use, in the same industry, a 5-year averaging period for
the SBA's size standard and a 3-year averaging period for other
agencies' size standards. To avoid such confusion and inconsistency, in
this final rule, SBA is adopting the 5-year averaging period for
calculating the average annual receipts for all SBA's receipts-based
size standards. For the same reason, SBA is also adopting the same 5-
year averaging period for both services and non-services industries
when approving receipt-based size standards by other federal agencies.
Comments on Moving From a 3-Year Averaging Period to a 5-Year Averaging
Period
Comments Supporting the 5-Year Averaging Period
Of the 212 pertinent comments received, 173 (or approximately 82%)
supported the SBA's proposal to change its method for calculating
annual receipts from a 3-year averaging period to a 5-year averaging
period, although some of those comments rejected other aspects of the
proposed rule. Commenters expressed support for the proposed change for
a variety of reasons, as discussed below.
A vast majority of commenters maintained that the proposed change
would benefit small businesses that are either about to exceed or have
just exceeded the relevant size standards (often referred to as ``mid-
size businesses'') by allowing them more time to develop capabilities,
strengthen and diversify experience, and build resources, thus enabling
them to compete successfully for unrestricted opportunities in the
full-and-open market with very large businesses that have extensive
capabilities, experience, and past-performance qualifications. Several
commenters shared that a
[[Page 66564]]
transition from ``small'' to ``other-than-small'' status is much more
difficult than a transition from ``very small'' to ``small'' status.
Some indicated that a longer lookback period would also ameliorate the
current dilemma growing small businesses face in the Federal market
when they exceed their size standards: Deciding whether to restrain
growth to remain small (and avoid the difficulty of competing in a
full-and-open environment), sell, or go out of business.
Another common comment was that the change from a 3-year averaging
period to a 5-year averaging period will be very helpful to small
businesses of every size, especially those that have successfully grown
to revenues above the 3-year average for their respective NAICS codes.
Some commenters expressed support for the proposed change because the
5-year averaging method would promote fairness and increase the
accuracy of size representation. For example, one commenter explained
that ``one abnormally successful year could cause a small business to
size out of the standard. Amortizing a year of success over five years
instead of three will likely lengthen a small business' eligibility
period and be a more accurate reflection of that business' true
operations.'' Another commenter explained that a firm's temporary spike
in revenue ``may not have resulted in increased infrastructure for the
firm such that it will be ready to compete in the open market.''
Several other commenters expressed support for the proposed rule
because it would give advanced small firms more time to take advantage
of SBA small business assistance programs. Similarly, another commenter
explained that ``Nurturing small business capabilities is important
because it results in more price competition, it spurs innovation, and
helps create jobs.'' Other commenters expressed that growing small
businesses should be rewarded for their success with a longer lookback
averaging period.
Commenters also expressed support for the proposed change because
it would increase the total number of small businesses and strengthen
the Federal small business industrial or supplier base. Several
commenters maintained that, with the availability of more businesses
qualifying as small, the move to a 5-year averaging period would
increase set-aside opportunities for all small businesses as the
agencies are likely to set aside more contracts for small businesses.
Other commenters expressed that an expanded pool of small businesses
would benefit the Federal government by providing a larger and more
stable pool of qualified small businesses in the Federal procurement
market. The Federal government also will benefit from lower prices for
its procurements due to increased competition, and from reduced risks
by allowing agencies to retain their trusted and qualified incumbent
small business contractors for a longer period. Several commenters also
maintained that, with more businesses qualifying as small under the 5-
year receipts average, the change also would provide large prime
contractors with a robust pool of qualified small businesses to draw
from to meet their small business subcontracting requirements.
Several commenters also expressed support for the proposed change
because it would reduce the impacts of unusual spikes in revenues in
some years on growing small businesses and enable them to adjust to
revenue swings due to fluctuations in economic conditions, business
environment, and changes in the Federal market. For example, one
commenter explained that it is increasingly common for the government
to utilize larger and longer indefinite delivery, indefinite quantity
(IDIQ) contract vehicles, where one high-valued contract or task order
can throw a small business out of its small business status. Some
commenters supporting the proposed rule also stated that, under the 5-
year averaging period, growing small businesses will be able to
maintain their small business status for a longer period and, as a
consequence, achieve and sustain growth. A number of comments also
supported the SBA's proposal to remove ``Schedule K'' from the
definition of receipts.
SBA's response:
SBA agrees with commenters that this rule will benefit small
businesses, the Federal Government, and large businesses. With an
expanded pool of small businesses, the Federal Government will have
more qualified small businesses to choose from, and as a result, likely
will set aside more contracts for small businesses. SBA also agrees
with commenters that the 5-year averaging period will allow more small
firms to benefit from SBA's small business assistance programs by
extending their small business status for a longer period. The change
would also enable small businesses that have just exceeded their size
standards to regain their small business status and to benefit from
Federal small business assistance. SBA believes that the change to a 5-
year averaging period will expand benefits to all small businesses over
the long-run, although the proposed change would have led to some
negative impacts in the short-run. Accordingly, in this final rule,
except for the Business Loan and Disaster Loan Programs, SBA is
amending its regulations on the calculation of average annual receipts
for all receipts-based SBA size standards from a 3-year averaging
period to a 5-year averaging period, with a transition period through
January 6, 2022, during which firms (and their affiliates) can choose
either a 3-year or a 5-year averaging period. SBA is also removing
``Schedule K'' from the definition of receipts, as proposed.
Opposing Comments
Of 212 pertinent comments that SBA received, 37 opposed the change
to the averaging period for annual receipts calculation from 3 years to
5 years. Comments that opposed the proposed rule mostly focused on one
or more of the following three issues: (1) Disadvantages to firms with
declining revenues, (2) undue advantages to ``larger'' small
businesses, and (3) additional burden on borrowers and lenders. Below,
SBA summarizes each of the three comment categories listed above.
(1) Disadvantages to Firms with Declining Revenues. Of the 37
comments opposing the shift to a 5-year averaging period, 7 commenters
opposed the rule based on the reason that a 5-year averaging period
would disadvantage firms with declining revenues. Of these 7
commenters, 2 affirmatively stated that their firm's size status would
change from small to other-than-small as a result of the shift to a 5-
year averaging period. Several commenters opposing the proposed rule
observed that it will take longer for small businesses to qualify as
small again once they have exceeded the size standard. Other commenters
noted that the proposed rule would harm small firms with declining
revenues, causing them to lose their small business size status sooner
under the 5-year average receipts as compared to the 3-year receipts.
One commenter explained that ``while increasing the receipts lookback
period from 3 years to 5 years will benefit many growing companies, it
could also be detrimental to businesses that have experienced declining
revenues, as it would cause many such businesses to lose their small
business status despite declining receipts.'' Another commenter stated
that it was unfair for small businesses to be ``penalized'' for having
declining revenues. The commenter explained that business concerns that
face a downturn ``should not be penalized, by being excluded from
eligibility for SBA's small business programs. . . .
[[Page 66565]]
Such an outcome would be an unintended negative consequence of the
Act.'' Some commenters contended that the proposed change primarily
benefits growing and more successful larger small businesses by
enabling them to maintain their small business status longer and better
prepare for a successful transition to the full-and-open market, but it
hurts emerging and smaller small businesses that are in need of the SBA
assistance the most.
SBA's response:
SBA acknowledges that the move from a 3-year averaging period to a
5-year averaging period could, as an unintended negative impact, cause
some small businesses that are close to their size standard to lose
their small business status immediately or subsequently during the
period of declining annual revenues. SBA agrees that a firm that
exceeds the size standard based on a 5-year average, but then has
subsequent years of declining revenues, will face a longer period
before regaining its small business status. In order to mitigate this
impact, in this final rule, except for the Business Loan and Disaster
Loan Programs, SBA is providing a transition period until January 6,
2022, during which firms will be allowed to choose either the 3-year
receipts average or 5-year receipts average for size eligibility
purposes.
(2) Undue Advantages to ``Larger'' Small Businesses. Of the 37
comments opposing the shift to a 5-year averaging period, 5 comments
opposed the proposed rule on the grounds that it may give an undue
advantage to ``larger'' small businesses near the industry size
threshold to the detriment of ``smaller'' small businesses in competing
for small business opportunities. One commenter expressed concerns that
the move to the 5-year averaging period lacked benefits for ``smaller''
small firms that need SBA's assistance the most. The commenter
explained that by extending the measurement period, it only allows for
companies to resist growth, control revenue and continue to be small.
This process, if extended, will only provide a further advantage to
those who are on the upper limit but does nothing to help those who are
truly small.
A number of commenters opposed the rule because it will allow
companies to continue to be small businesses after the period at which
those businesses should transition to other-than-small business status,
making it difficult for smaller small businesses to compete against
their larger counterparts under the 5-year averaging period. One
commenter, expressing concerns about this issue, explained that the
proposed rule would ``keep start-up small businesses from competing for
small business set-aside opportunities . . . and allow `extended' small
businesses with contracts to out compete those businesses that are
truly `small.' '' Some of these commenters raised industry-specific
concerns.
SBA's response:
SBA acknowledges that smaller small firms could face some
disadvantages in competing for set-aside contracts against a larger
pool of small firms, especially against the newly qualified larger
small businesses and advanced small businesses who are able to remain
small for a longer period. However, as detailed in SBA's benefit-cost
analysis of the proposed rule, the change from a 3-year averaging
period to a 5-year averaging period will increase the total number of
small businesses, which would, because of greater potential small
business competition for government contracts, likely lead to expansion
of set-aside opportunities for all small businesses. In addition, as
some commenters stated, that ``smaller'' small firms may not be in
direct competition with ``larger'' small firms due to differences in
their missions, capabilities, and resources, and therefore, would not
face negative impacts from an increase in the number of ``larger''
small firms. As one organization commenting on the proposed rule
explained, ``these emerging small companies tend to have their own swim
lanes, and do not typically compete against `larger' small businesses
directly and in some cases do not compete in the federal market all.''
The contracts awards data also shows that in most industries the
majority of small business contract dollars go to businesses that are
substantially smaller than their size standards. The results from some
industries with recent large increases to size standards also reveal
that small businesses under the previous size standards continue to
receive the same amount of contract dollars as before the increase. SBA
agrees that the move to a 5-year averaging method is likely to benefit
advanced small businesses that have just exceeded or are about to
exceed their size standards more than their smaller counterparts in the
short-run, but in the long-run it will benefit all small businesses at
every level as they continue to grow and approach the size standard.
(3) Additional Burden on Borrowers and Lenders. Of the 37 comments
opposing the shift to a 5-year averaging period, 23 (including one
trade association representing lenders serving small businesses under
the SBA CDC/504 loan program) opposed the move to the 5-year average
because the change would cause undue additional burden on borrowers and
lenders under the Business Loan Programs. An additional 28 commenters
(including another trade association representing lenders serving small
businesses under the SBA's 7(a) loan program) also expressed similar
concern that the 5-year averaging would result in an undue additional
burden on borrowers and lenders participating in the Business Loan
Programs, but they did not specifically oppose the shift to a 5-year
averaging period for SBA's revenue-based size standards.
A majority of these commenters included members of those two trade
associations in support of the position of their respective
associations. Some commenters opposed the rule on the basis that it may
require SBA Lenders to collect and review two additional years of tax
returns or financial statements to establish eligibility for the SBA's
loan programs. Some of these commenters expressed concerns that this
will add costs to loan processing, increase turn-around times, and
discourage small businesses from participating in the SBA's loan
programs. One trade association commented that ``the process for
obtaining an SBA loan already requires extensive documentation from a
small business, and this additional requirement increases that burden
without any underlying benefit to the small business.'' The trade
association requested that SBA ``give consideration to allowing the
service-industry size standard calculation to remain at its current 3-
year averaging period for the SBA loan guarantee programs.''
Some commenters noted that a central premise of the proposed change
appears to address the concern that the current 3-year averaging method
``ejects'' growing small businesses from Federal small business
contracting programs before they are ready to compete in the full and
open market. They stated that there is no such concern as it relates to
the SBA's loan programs, as small businesses seeking or obtaining SBA's
loans are rarely ``ejected'' from eligibility due to size.
Several commenters asked that SBA clarify that the 5-year averaging
period is intended to apply only to SBA's receipts-based size
standards, not for any other loan application purpose. One trade
association commented that ``Tax return information is used for
multiple purposes related to the loan application process,'' including
verifying an applicant's historical cash flow, income, or tax payment
history. The trade association further explained, ``None of those
purposes would require or
[[Page 66566]]
substantially benefit from a look-back period greater than 3 years.'' A
trade association and a number of other commenters asked that SBA
exempt the SBA's loan programs from the change, allowing SBA lenders to
continue to apply a 3-year receipts average. Other commenters
(including a trade association representing 7(a) lenders) requested
that SBA's final rule ``[S]pecifically include language clarifying that
the longer 5-year period is intended to apply only for purposes of
determining size for loan applicants using SBA's traditional revenue-
based sized standards, and not for any other loan application
purpose.''
SBA's response:
In response to comments regarding the burden of the rule on SBA
Lenders and loan applicants, SBA has determined that the Business Loan
and Disaster Loan Programs should not be included in this final rule.
SBA included the Business Loan and Disaster Loan Programs in the
proposed rule's cost-benefit analysis, but, otherwise, the initial
proposed rule did not discuss the effect that the rule would have on
SBA Lenders and loan program participants. Based on the comments
expressing that SBA Lenders and loan program applicants would
experience burden, SBA will seek additional comment and public input
through a proposed rule at a later date to determine how best to
consider changes to size eligibility in the Business Loan and Disaster
Loan Programs. Through this later proposed rule, SBA intends to ask for
data and additional detail about the burden faced by SBA Lenders and
applicants, and for comment on any benefit that applicants might obtain
through a longer averaging period for determining eligibility for SBA's
Business Loan and Disaster Loan Programs.
Comments on Calculating of Average Receipts After the Sale or
Acquisition of a Segregable Division
SBA received 20 comments responding to its proposed clarification
on the calculation of the annual receipts of a concern where the
concern sells or acquires a segregable division during the applicable
period of measurement. Of those 20 comments, 3 comments agreed with
SBA's proposed clarification, 5 comments disagreed, 11 comments
requested further clarification, and 1 comment was not clear as to its
stance on this issue.
The 3 commenters who agreed with SBA's proposed treatment of the
sale or acquisition of a segregable division emphasized that the
receipts of a division remain the receipts of the selling concern even
after it is sold and that the receipts of an acquired division prior to
the acquisition do not become the receipts of the acquiring concern
after the acquisition. One association commenting on the proposed rule
stated that it supports SBA's position because it ``provides clarity to
the community with regard to the application of the former affiliate
rule.'' The same association also requested that SBA expand the scope
of its clarification to include segregable divisions and ``other assets
not held as a separate legal entity.'' The association stated that such
an expansion would ``ensure that SBA's clarification applies to the
sale or purchase of non-segregable assets as well, e.g., when an entity
acquires the assets performing a specific contract.''
The 5 commenters who disagreed with SBA's proposed treatment of the
sale or acquisition of a segregable division stated that (1) it
elevates form over substance in distinguishing between a division and a
subsidiary that is a separate legal entity, (2) it would create a
burden for businesses seeking to benefit from selling off a division by
moving all of its assets to a newly created subsidiary, (3) it would
harm businesses that relied on current SBA policy when selling
segregable divisions and were small as a result of the sale, and (4) it
would create unpredictability and uncertainty in good-faith size status
calculations.
The 11 commenters who requested further clarification all stated
(1) that they would have liked to see proposed regulatory text, and (2)
that the Office of Hearings and Appeals (OHA) cases that SBA cited in
the proposed rule do not make a distinction between divisions and
subsidiaries. One commenter cited two additional OHA decisions which it
believes contradict SBA's distinction between a division and
subsidiary. The commenter stated that in the proposed rule, ``SBA cites
a quotation from such a decision which provides that `a firm which
acquires most of the assets of a subsidiary or division of a larger
firm is affiliated only with that subsidiary or division, and not with
the entire parent company' (emphasis added). As such, it appears that
SBA's Office of Hearings and Appeals does not, in fact, make a
distinction between divisions and subsidiaries.''
SBA's response:
SBA agrees with the commenters who stated that the receipts of a
sold division remain the receipts of the selling concern after the
sale, just as the receipts of an acquired division prior to its
acquisition should not be treated as the receipts of the acquiring
concern prior to the acquisition. SBA believes that it is not logical
to allow a firm to exclude the receipts of a former division just
because that division was sold, since those receipts accrued to the
concern.
SBA believes that there really is a difference between the sale or
acquisition of a segregable division as opposed to the sale or
acquisition of a separate legal entity. The sale or acquisition of a
division is not a question of affiliation. It simply represents an
addition or subtraction to the concern itself. This is distinct from
the sale or acquisition of a separate legal entity, which implicates
questions of affiliation.
Regarding the OHA cases cited by the commenters, none of these
decisions speak specifically to how receipts should be calculated after
the sale or acquisition of a segregable division. However, as stated by
several commenters, SBA is not obligated to follow OHA decisions when
putting forth changes to its regulations.
For all the reasons above, SBA is adding the language to Sec. Sec.
121.104(d)(4) and 121.106(b)(4)(ii) to clarify that the former
affiliate rule does not permit a concern to adjust its receipts when
the concern sells a segregable division that is not a separate legal
entity.
Comments on the Exemption From the 5-Year Averaging Period
Although not specifically requested in the proposed rule, SBA
received 31 comments requesting some sort of alternative option which
would allow firms to use either a 3-year average or 5-year average of
annual receipts depending on which one would be more advantageous to
them. The comments proposing such an option suggested that the 3-year
vs. 5-year option be for available for a specific period or be made
permanent. Of the 31 total comments addressing this issue, 13
commenters recommended using a transition period of 2 years or less; 12
recommended a transition of 3 or more years; 4 suggested making the
transition period permanent; and 2 did not specify a duration.
In support of the transition period were commenters both for and
against the shift to a 5-year averaging period for calculating annual
receipts. Of the 31 comments supporting a transition period, 20
supported the proposed rule; 5 opposed the proposed rule; 5 supported
some elements while opposing others; and 1 comment did not express
support or opposition to the move from a 3-year averaging period to a
5-year averaging period but recommended that SBA consider the
transition period as an alternative to mitigate the impact on
businesses that
[[Page 66567]]
are currently small under the 3-year receipts average but would become
other-than-small under the 5-year average receipts.
SBA found that these commenters supported the adoption of a
transition period for two reasons: (1) To ensure an organized and
transparent implementation of the final rule, and (2) to minimize harm
to small firms with declining revenues or to those becoming other than
small under the 5-year receipts upon the implementation of the final
rule.
For example, one commenter suggested that SBA implement a 2-year
transition period to reduce confusion and uncertainty for small firms
that have occurred since the Small Business Runway Extension Act was
signed into law. The commenter explained that ``some firms have been
submitting proposals using a 3-year average in accordance with the
SBA's guidance, while others have used a 5-year average in accordance
with the new law. Due to this uncertainty, [Commenter] recommends
allowing a two-year transition period for small companies . . .''
Another commenter recommended that SBA ``provide for a reasonable
transition period for implementation . . . to allow government systems
to be updated and to give the contractor community time to properly
implement the size calculation change.''
One commenter, expressing concern regarding the proposed rule's
impact on firms with declining revenues, explained that ``While
increasing the look-back period from 3 years to 5 years will provide a
benefit to many growing companies, it could be detrimental to
businesses that have experienced declining revenue.'' The commenter
further stated that ``SBA should consider a hybrid approach whereby
contractors are permitted to calculate revenues under both the 3-year
period and the 5-year period and use the lower of the two results to
determine its size status. This approach would be beneficial to both
those small contractors that are experiencing a period of revenue
growth, as well as those facing declining revenues.''
SBA's response:
SBA agrees with the comments supporting a temporary transition
period under which firms still could choose to use a 3-year averaging
period. A plurality of commenters asked for a 2-year transition period
or less, and SBA agrees that a 2-year period is appropriate because 2
years is an adequate time to allow firms to prepare for a permanent
transition to a 5-year averaging period. Therefore, for the SBA
programs affected by this rule, SBA will allow firms to choose either a
3-year or 5-year averaging period through January 6, 2022. After that
date, firms with at least 5 years of receipts will be required to use a
5-year averaging period. A firm with fewer than 5 years of receipts
will average its annual receipts over its existence.
SBA does not believe that allowing for alternate averaging periods
on a permanent basis would be beneficial. Using multiple averaging
periods in the long term will result in confusion about how to
determine size for Federal opportunities, including procurements.
Within a single contract competition, businesses would be able to
determine size on a separate basis. After the transition period, there
is not sufficient reason to justify maintaining two separate averaging
periods.
Other Comments
SBA received some additional comments that addressed issues which
did not fit into any of the above categories. One commenter requested
that SBA change its regulations at 13 CFR 124.112(e)(2) to allow an
8(a) Business Development (BD) Program participant to change its
primary industry classification using the last 5 completed fiscal
years, instead of the current 3 completed fiscal years. This commenter
stressed the advantage of reconciling this primary industry
classification calculation period with the size determination
calculation period, especially at the 5th year annual update for an
8(a) BD Program participant.
SBA also received a few comments concerning the timeline for the
implementation of the final rule. Most of these commenters suggested
that SBA implement the final rule as soon as possible. One commenter
stated that it is unlawful to delay the implementation of the new law,
and the comment from one trade association suggested that SBA make the
final rule retroactive to December 17, 2018, the date of enactment of
Public Law 115-324. Another commenter recommended delaying the
implementation of the final rule until January 1, 2021 if SBA decides
to not grant a grace period to use the 3-year lookback. The commenter
stated, ``dropping the 3-year rule `grace period' in the middle of the
year will only confuse and complicate the implementation of the rule.''
One commenter suggested that SBA establish a 5-year averaging
period for employee-based size standards as well.
SBA's response:
The comment that SBA update its regulations at 13 CFR 124.112(e)(2)
is outside the scope of establishing and reviewing size standards. This
rule is only concerned with the method of calculation of annual
receipts for size standards purposes. The comment regarding 13 CFR
124.112(e)(2) concerns a calculation related to the primary industry
classification under 8(a) BD Program and that is outside the scope of
this rule. Similarly, this rule does not affect the application of a 3-
year average in the ``economic dependence'' test under 13 CFR
121.103(f)(2).
With respect to the comments concerning the implementation
timeframe of the final rule, Public Law 115-324 did not include an
effective date for the averaging change. Section 3(a)(2)(C) of the
Small Business Act requires SBA to provide an opportunity for public
notice and comment through the rulemaking process prior to implementing
changes to size standards prescribed through section 3(a)(2).
Accordingly, on December 21, 2018, SBA issued an Information Notice
(6000-180023) advising that, until SBA makes necessary changes to its
regulations, businesses must report their receipts based on a 3-year
average. Thus, making the rule retroactive to the December 17, 2018,
enactment date would not only run counter to SBA's guidance, but also
would require corrections to contracts awards data in the Federal
Procurement Data System-Next Generation (FPDS-NG) to reflect changes in
size status of contractors due to the change in the averaging period.
Conversely, delaying the implementation date would be against the
interests of many small businesses and Federal agencies that want to
see the final rule being implemented as soon as possible. Accordingly,
this final rule will be effective after 30 days from the date of its
publication in the Federal Register.
Lastly, this rule does not change the calculation period for
employee-based size standards. SBA does not find sufficient reason from
the comments to a propose a change to the period for employee-based
size standards.
Conclusions
Based on the analyses of impacts using the latest relevant industry
and Federal contracting data available to SBA when the proposed rule
was prepared and thorough evaluation of all public comments on the
proposed rule, as discussed above, SBA is taking the following actions
in this final rule, except for the Business Loan and Disaster Loan
Programs:
(i) Adopting the 5-year averaging period for calculating annual
revenues of firms and revenues of their affiliates
[[Page 66568]]
in all industries that are subject to SBA's receipts-based size
standards;
(ii) Adopting the 5-year averaging period for calculating annual
revenues of firms (including affiliates, if any) in all industries for
prescribing receipts-based size standards by other Federal agencies;
and
(iii) Providing a transition period until January 6, 2022, allowing
firms (and their affiliates, if any) to choose either a 3-year
averaging period or a 5-year averaging period for calculating average
annual receipts for size standards purposes.
Section-by-Section Analysis
Section 121.104
The final rule removes ``Schedule K'' from the definition of
receipts. SBA has found that reviewing Schedule K is generally not
useful, but SBA reserves the ability to request a Schedule K as part of
SBA's review of the other Internal Revenue Service (IRS) forms listed
in Sec. 121.104(a).
For consistency with the size standard averaging period being
changed in Sec. 121.903, for the purposes of applying SBA's receipts-
based size standards, the final rule changes the averaging period for a
business that has been in business for 5 or more fiscal years to a 5-
year period, i.e., the business calculates its total receipts over the
5-year period and divides by 5. Under the final rule, if a business has
been in business for less than 5 complete fiscal years, the business
calculates its total receipts, divides by the number of weeks in
business, and multiplies by 52. This is the same process SBA currently
uses when a business has less than 3 completed fiscal years. If a
business has a short year as one of its 5 years, the business
calculates its total receipts over the 5-year period, divides by the
number of weeks in the short year and its other 4 fiscal years, and
multiplies by 52. This too is the same process SBA currently uses.
The 5-year averaging period in Sec. 121.104 would not distinguish
between firms in service industries and other firms subject to
receipts-based size standards. SBA believes that, in applying SBA's own
size standards, separating out service-industry firms would cause
confusion and create a greater compliance burden on firms that
participate in both services industries and non-services industries
(such as agriculture, construction, and retail trade) with receipts-
based size standards.
This final rule only would affect the application of SBA's new size
standard rules after its effective date. Thus, until the effective date
of a final rule, SBA will continue to apply the 3-year averaging period
in the present Sec. 121.104 for calculating average annual receipts
for all SBA's receipts-based size standards. Since size is determined
as of the date when a firm certifies its size as part of its initial
offer which includes price, the 3-year calculation period will apply to
any offer submitted prior to the effective date of the final rule.
Thus, even if SBA receives a request for a size determination or size
appeal after the effective date of the final rule, SBA will still use a
3-year calculation period if the determination or appeal relates to a
certification submitted prior to the final rule's effective date.
Misrepresentations made under the existing calculation period are
material for the purposes of criminal, civil, or administrative
actions.
SBA also clarifies how it believes annual receipts should be
calculated in connection with the acquisition or sale of a division.
Specifically, the final rule provides that the annual receipts of a
concern would not be adjusted where the concern sells or acquires a
segregable division during the applicable period of measurement or
before the date on which it self-certified as small. This would be
different from how SBA treats the sale or acquisition of a subsidiary.
In the case of a subsidiary, SBA's regulations provide that ``[t]he
annual receipts of a former affiliate are not included if affiliation
ceased before the date used for determining size. This exclusion of
annual receipts of a former affiliate applies during the entire period
of measurement, rather than only for the period after which affiliation
ceased.'' 13 CFR 121.104(d)(4).
SBA believes that the sale or acquisition of a division is
different from buying or selling a separate legal entity and, as such,
should be treated differently. Any receipts attributable to a specific
division of a concern are certainly receipts earned by the concern.
Even if that division is later sold, its receipts were always part of
the receipts directly received by the concern itself, and SBA believes
that those receipts should remain a part of the concern's receipts
after the sale for purposes of determining the concern's size.
Similarly, where a concern acquires a segregable division from another
business entity during the applicable period of measurement, SBA would
not increase the concern's overall receipts by the amount of receipts
attributable to that division.
SBA understands that some may feel that distinguishing the sale of
a division from that of a subsidiary would elevate form over substance,
and would merely require a seller to move assets into a separate
subsidiary and then sell that subsidiary in order to bring the
transaction under the rule. However, as noted above, SBA believes that
there really is an important distinction between a division and a
separate legal entity.
The Final Rule adds a transition period through January 6, 2022,
during which a firm may calculate its receipts and the receipts of its
affiliates using either a 3-year average or a 5-year average. The Final
Rule adds a paragraph (c)(4) to use a 3-year averaging period for the
Business Loan Programs, which are the 7(a) Loan Program, the Microloan
Program, the Intermediary Lending Pilot Program, and the Development
Company Loan Program (``504 Loan Program''), and the Disaster Loan
Programs, which are Physical Disaster Business Loans, Economic Injury
Disaster Loans, Military Reservist Economic Injury Disaster Loans, and
Immediate Disaster Assistance Program loans. SBA intends to seek
comment on the Business Loan and Disaster Loan Programs in a proposed
rule through a separate rulemaking.
Section 121.903
As required by Public Law 115-324, SBA is amending the requirements
for agencies that seek to propose and adopt size standards for their
own programs, instead of applying SBA's size standards. Under the final
rule, a non-SBA agency's receipts-based size standard, whether applying
to services or non-services firms, must be proposed with a 5-year
averaging period.
Section 3(a)(2)(ii)(III) of the Small Business Act still provides
that other agencies prescribe size standards for industries other than
services or manufacturing using ``data over a period of not less than 3
years.'' While Congress did not change this statutory language, SBA
believes that it also can require other agencies establishing size
standards for industries other than services or manufacturing to use
data over a 5-year period and specifically solicited comment on whether
to make such a change. SBA received strong support for applying the 5-
year averaging period for all industries. To avoid confusion from using
the 5-year average receipts for SBA's size standards and 3-year average
receipts for other agencies' size standards and promote consistency in
measuring business size across the Federal government, in this final
rule, SBA is also adopting the same 5-year averaging period for all
receipts-based size
[[Page 66569]]
standards proposed by other Federal agencies.
This new calculation period does not affect existing non-SBA size
standards that specify a 3-year average unless the responsible agency
proposes and finalizes changes to the existing specification of a 3-
year average. This is consistent with the change in Public Law 115-324
to the requirements for prescribing a non-SBA size standard, given the
lack of any restrictions in the Small Business Act or Public Law 115-
324 on applying an existing size standard. In adopting or proposing a
change to the averaging period for its existing size standard, the
responsible agency should coordinate with SBA using the procedure in
Sec. 121.903.
Response to Office of Advocacy Comments
In response to the Proposed Rule, the Office of Advocacy of the SBA
(Office of Advocacy) requested that the SBA update its Initial
Regulatory Flexibility Analysis (IRFA) to include more relevant
alternatives to the proposed regulatory change to mitigate negative
impacts on small businesses. Specifically, the Office of Advocacy
suggested that SBA allow the public to consider at least 2 specific
alternatives: (1) A 2-year transition period during which firms could
use either a 3-year or 5-year averaging period, or (2) allowing a small
business that has been awarded a contract to recertify its small
business size status through any option periods.
As suggested by the Office of Advocacy, SBA has adopted a 2-year
transition period that will end January 6, 2022. During that period,
firms will choose either a 3-year or 5-year averaging period. Thus,
firms that wish to continue using a 3-year average for certifying or
assessing small business size status may continue to do so until
January 6, 2022.
With regard to updating the IRFA, SBA does not believe that it is
practical to issue a revised IRFA for public comment at this time.
There is an urgent need to implement the intent of Congress and a
further delay would result in more uncertainty and confusion for small
businesses and the Federal contracting community. A number of comments
to the proposed rule urged SBA to implement the final rule as soon as
possible. In addition, SBA has adopted one of the relevant alternatives
discussed by the Office of Advocacy, a 2-year transition period during
which firms could use either a 3-year or a 5-year averaging period.
Thus, issuing a revised IRFA for public comment would be superfluous.
Accordingly, SBA is declining to issue a revised IRFA for public
comment with the alternatives proposed by the Office of Advocacy.
With regard to recertification, SBA believes it would be extremely
complicated to allow a firm that has already been awarded a contract to
recertify its size status, after the transition period, using either
the 3-year or 5-year averaging period through the length of that
contract and any options. This would create extensive tracking and
recordkeeping requirements that would also result in uncertainty and
unpredictability for firms trying to determine their size status after
the end of the 2-year transition period created in this rule. Thus,
even if a firm initially certified for a contract under a 3-year
averaging period, a firm must use a 5-year average when it submits a
new certification or recertification for that contract after the end of
the transition period.
Compliance With Executive Orders 12866, 12988, 13132, 13563, and 13771,
the Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C. Ch. 35)
A. Executive Order 12866
The Office of Management and Budget (OMB) has determined that this
final rule is not a significant regulatory action for purposes of
Executive Order 12866. Nonetheless, as required by section 3(a)(6) of
the Small Business Act, 15 U.S.C. 632(a)(6), in the next section, SBA
provides a benefit-cost analysis of this final rule, including: (1) A
statement of the need for the proposed action, and (2) an evaluation of
the benefits and costs--both quantitative and qualitative--of this
regulatory action. This rule is also not a ``major rule'' under the
Congressional Review Act, 5 U.S.C. 800, et seq.
a. Benefit-Cost Analysis
1. What is the need for this regulatory action?
As stated elsewhere, the Small Business Act delegates to SBA's
Administrator the responsibility for establishing small business size
definitions (usually referred to as ``size standards''). Recently,
Public Law 115-324 modified the requirements for proposed small
business size standards prescribed by an agency without separate
statutory authority to issue size standards.
The need of this final rule is to carry out the intent of Public
Law 115-324 and to ensure consistency in the calculation of average
annual receipts for size standards across the Federal Government.
SBA's mission is to aid and assist small businesses through a
variety of financial, procurement, business development and counseling,
and disaster assistance programs. This regulatory action promotes the
Administration's goals and objectives and meets the SBA's statutory
responsibility to implement a new law impacting size definitions for
small businesses. One of SBA's goals in support of promoting the
Administration's objectives is to help small businesses succeed through
access to capital, Federal Government contracts and purchases, and
management, technical and disaster assistance.
2. What are the potential benefits and costs of this regulatory action?
Changing the period for calculating average annual receipts from 3
years to 5 years may enable some mid-size businesses that have just
exceeded size standards to regain small business status. Similarly, it
could also allow some advanced and larger small businesses about to
exceed size standards to retain their small business status for a
longer period. However, as stated in the June 24, 2019, proposed rule,
it could also result in some advanced small businesses having a 5-year
receipts average that happens to be higher than the 3-year receipts
average, thus ejecting them out of their small business status sooner.
Detailed impacts of the proposed change are discussed below.
It is difficult to determine the actual number of small and mid-
size businesses that would be impacted by Public Law 115-324 and this
regulatory action because there is no annual data on receipts of
businesses. The annual receipts data from the Economic Census special
tabulation are only available once every 5 years. Similarly, the System
for Award Management (SAM) only records the data on 3-year average
annual receipts of businesses over their 3 preceding fiscal years, but
not their annual receipts for each fiscal year. For example, the
receipts data for year 2018 is an average of annual receipts for 2017,
2016, and 2015. Similarly, the receipts data for 2017 is an average of
annual receipts for 2016, 2015, and 2014, and so on. A 5-year receipts
average for 2018 would be an average of annual receipts for 2017, 2016,
2015, 2014, and 2013.
Given the lack of annual receipts for each year, SBA approximated a
firm's 5-year average annual revenue for 2018 as follows:
[[Page 66570]]
[GRAPHIC] [TIFF OMITTED] TR05DE19.000
This result may slightly underestimate the 5-year revenue average
when annual revenues are rising (i.e., 2014 revenue > 2013 revenue >
2012 revenue) and overestimate it if annual revenues are declining
(i.e., 2014 revenue < 2013 revenue < 2012 revenue).
To estimate the 5-year receipts average for 2018 using the above
formula, SBA analyzed the 2018 SAM extracts (as of September 1, 2018)
and 2015 SAM extracts (as of September 1, 2015). The above 5-year
average annual receipts formula would only work for businesses that
were present in both 2015 and 2018 SAM extracts. One challenge was that
some businesses found in 2018 SAM could not be found in 2015 SAM and
vice versa. Excluding entities registered in SAM for purposes other
than government contracting and entities ineligible for small business
consideration (such as foreign governments and state-controlled
institutions of higher learning), there were a total of 346,958 unique
business concerns in SAM subject to at least one receipts-based size
standard. Of these concerns, 293,524 (or about 84.6 percent) were
``small'' in all North American Industry Classification System (NAICS)
industries, 9,990 (or 2.9 percent) were ``small'' in some industries
and ``not small'' in other industries, and 43,444 (or 12.5 percent)
were ``not small'' in any industry.
Excluding entities with ``null'' or ``zero'' receipts values,
194,686 firms (or about 56 percent) appeared both in 2018 SAM and in
2015 SAM and were included in the 5-year average annual receipts
approximation and calculation of number of businesses impacted. Of
those 194,686 matched firms subject to a receipts-based size standard,
154,220 (or about 79 percent) were ``small'' in all NAICS industries,
8,049 (or 4.1 percent) were ``small'' in some industries and other than
small (``not small'') in other industries, and 32,417 (or about 17
percent) were ``not small'' in any industry. In other words, 303,514
(or 87.5 percent) of 346,958 total concerns in SAM 2018 and 162,269 (or
83.3 percent) of 194,686 total matched firms were small in at least one
NAICS industry with a receipts-based size standard. These results are
summarized in Table 1, ``Size Status of Businesses in Industries
Subject to Receipts-Based Size Standards,'' below.
Table 1--Size Status of Businesses in Industries Subject to Receipts-Based Size Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total firms in 2018 SAM Firms in both 2015 SAM and
subject to least one receipts- 2018 SAM (matched)
based standard -------------------------------- Total to
Size status -------------------------------- % Matched matched ratio
Number of Number of % *
firms % firms
--------------------------------------------------------------------------------------------------------------------------------------------------------
Small in at least one industry.......................... 303,514 87.5 162,269 83.3 53.5 1.809
Small in all industries................................. 293,524 84.6 154,220 79.2 52.5 1.903
Small in some and not small in others................... 9,990 2.9 8,049 4.1 80.6 1.241
Large in all industries................................. 43,444 12.5 32,417 16.7 74.6 1.340
-----------------------------------------------------------------------------------------------
Total............................................... 346,958 100.0 194,686 100 56.1 1.782
--------------------------------------------------------------------------------------------------------------------------------------------------------
* To be used to translate the results from the matched data to overall 2018 SAM data.
According to Table 2, ``Distribution of Business Concerns Subject
to Receipts-Based Size Standards by Number of NAICS Codes,'' below, the
distribution of firms by the number of NAICS codes in the matched data
is very similar to that for the overall 2018 SAM data. About 42-44
percent of firms were in only one NAICS code that has a receipts-based
size standard, about 35 percent in 2-5 NAICS codes, about 12 percent in
6-10 NAICS codes, and about 8-10 percent in more than 10 NAICS codes.
In other words, 56-58 percent of firms were in multiple NAICS codes
with receipts-based size standards. Thus, it is quite possible that the
proposed change may impact a firm's
[[Page 66571]]
small business status in multiple industries. For purposes of this
analysis, an impacted firm is defined as one that would be impacted by
the change in terms of gaining, regaining, extending, or losing small
business status in at least one industry with a receipts-based size
standard.
Table 2--Distribution of Business Concerns Subject to Receipts-Based Size Standards by Number of NAICS Codes
----------------------------------------------------------------------------------------------------------------
Total firms in 2018 SAM with Matched firms between 2018 and
at least one receipts-based 2015 SAM
Number of NAICS codes NAICS code -------------------------------
--------------------------------
Count % Count %
----------------------------------------------------------------------------------------------------------------
1 NAICS code.................................... 153,184 44.2 82,082 42.2
2 to 5 NAICS codes.............................. 123,277 35.5 68,458 35.2
6 to 10 NAICS codes............................. 41,518 12.0 24,529 12.6
>10 NAICS codes................................. 28,979 8.4 19,617 10.1
---------------------------------------------------------------
Total....................................... 346,958 100.0 194,686 100.0
----------------------------------------------------------------------------------------------------------------
Note: A business concern is defined in terms of a unique local (vendor) DUNS number.
A central premise of Public Law 115-324 is that a 5-year annual
receipts average (as opposed to a 3-year annual receipts average) would
enable some mid-size businesses who have recently exceeded the size
standard to regain small business status and some advanced small
businesses close to exceeding the size standard to retain their small
business status for a longer period. However, this premise would only
hold true when businesses' annual revenues are rising. When businesses'
annual revenues are declining, due to economic downturns or other
factors, the 5-year annual receipts average could be higher than the 3-
year annual receipts average, thereby causing small businesses close to
their size standards to lose their small business status sooner. To
mitigate such negative impacts on small businesses, SBA has decided, in
consideration of public comments and the results from its own analysis,
to provide a 2-year transition period in which firms will be allowed to
elect either a 5-year or 3-year averaging period in calculating their
average annual receipts.
b. Impacts on Businesses From the Change
By comparing the approximated 5-year annual receipts average with
the current receipts-based size standard for each of the 194,686
matched business concerns in each NAICS code subject to a receipts-
based size standard, in the proposed rule, SBA identified the following
4 possible impacts from changing the averaging period for annual
revenues from 3 years to 5 years:
i. The number of mid-size businesses that have exceeded the size
standard and would regain small business status in at least one NAICS
industry with a receipts-based size standard (i.e., 3-year average >
size standard >= 5-year average)--positive impact;
ii. the number of advanced small businesses within 10 percent below
the size standard that would have their small business status extended
for a longer period in at least one NAICS industry with a receipts-
based standard (5-year average < 3-year average <= size standard and
0.9*size standard < 3-year average <= size standard)--positive impact;
iii. the number of currently small businesses that would lose their
small business status in at least one NAICS industry subjected to at
least one receipts-based size standard (i.e., 3-year average <= size
standard < 5-year average)--negative impact; and
iv. the number of advanced small businesses within 10 percent below
the size standard that would have their small business status shortened
in at least one NAICS industry subject to a receipts-based standard (3-
year average < 5-year average <= size standard and 0.9*size standard <
3-year average <= size standard)--negative impact.
In this final rule, SBA is changing the period for calculation of
average annual receipts for all of its as well as other agencies'
receipts-based size standards from 3 years to 5 years. The purpose of
Public Law 115-324 is to allow small businesses more time to grow and
develop competitiveness and infrastructure so that they are better
prepared to succeed under full and open competition once they outgrow
the size threshold. However, as stated in the proposed rule, a longer
5-year averaging period may not always and necessarily provide relief
to every small business concern. As discussed in the proposed rule,
when annual revenues are declining or when annual revenues for the
latest 3 years are lower than those for the earliest 2 years of the 5-
year period, the 5-year average would be higher than the 3-year
average, thereby ejecting some advanced small businesses out of their
small business status sooner or rendering some small businesses under
the 3-year average not small immediately.
In the proposed rule, SBA described 4 different types of impacts on
small businesses from changes to the averaging period for annual
receipts from 3 years to 5 years as follows: (i) Enabling current large
or mid-size businesses to gain small business status (impact i); (ii)
enabling current advanced small businesses to lengthen their small
business status (impact ii); (iii) causing current small businesses to
lose their small business status (impact iii); and (iv) causing current
small businesses to shorten their small business status (impact iv).
However, with the SBA's decision to provide a 2-year transition
period thereby allowing firms to choose either their 5-year average
annual receipts or their 3-year average annual receipts, the two
negative impacts (namely impact (iii) and impact (iv)) do not apply to
this final rule. Accordingly, this final rule provides the analysis of
the two positive impacts (namely impact (i) and impact (ii)) only.
Table 3, `Percentage Distribution of Impacted Firms by the Number
of NAICS Codes,' below, provides these results based on the 2018 SAM--
2015 SAM matched firms.
[[Page 66572]]
Table 3--Percentage Distribution of Impacted Firms by the Number of NAICS Codes
--------------------------------------------------------------------------------------------------------------------------------------------------------
% Distribution of impacted firms by number of NAICS codes
Number of -------------------------------------------------------------------------------
Impact * impacted firms 2-5 NAICS 6-10 NAICS >10 NAICS
1 NAICS code codes codes codes Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Currently large in all NAICS codes
Impact (i).......................................... 914 36.0 36.1 13.6 14.3 100.0
Currently small in all NAICS codes
Impact (ii)......................................... 1,255 25.3 39.6 16.3 18.8 100.0
Currently small in some NAICS and not small in others
Impact (i).......................................... 1,640 0.0 24.6 24.2 51.2 100.0
Impact (ii)......................................... 1,138 0.0 25.0 26.0 49.0 100.0
Total Impact by Impact Type
Impact (i).......................................... 2,554 12.9 28.7 20.4 38.0 100.0
Impact (ii)......................................... 2,393 13.3 32.6 20.9 33.2 100.0
-----------------------------------------------------------------------------------------------
Total positive impact........................... 4,687 13.8 31.8 20.7 33.8 100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small businesses extending small business status.
It is highly notable that the distribution of impacted firms by the
number of NAICS codes, as shown in Table 3, is very different as
compared to a similar distribution based on the overall matched and
total 2018 SAM data (see Table 2), especially with respect to firms
with only one NAICS code and those with more than 5 NAICS codes. For
example, as shown in Table 2, above, more than 40 percent of all firms
in the overall data were associated with only one NAICS code, as
compared to less than 15 percent among impacted firms in Table 3.
Similarly, firms with more than 5 NAICS codes accounted for about 20
percent of all firms in the original data, as compared to more than 50
percent among impacted firms. It is also notable that NAICS Sectors 54,
56, and 23 together accounted for more than 70 percent of impacted
firms, with Sector 54 (Professional, Scientific and Technical Services)
accounting for about 35 percent, followed by Sector 23 (Construction)
about 25 percent, and Sector 56 (Administrative and Support, Waste
Management and Remediation Services) about 12-13 percent.
Each of these impacts was then multiplied by an applicable factor
or ratio, as shown in the last column of Table 1, to obtain the
respective impacts corresponding to all firms in 2018 SAM subject to at
least one receipts-based size standard. These results are presented
below in Table 4, ``Impacts from Changing the Averaging Period for
Receipts from 3 Years to 5 Years.'' The last column of the table shows
the percent of firms impacted relative to all business concerns in 2018
SAM.
Because the SAM data only captures businesses that are primarily
interested in Federal procurement opportunities, the SAM-based results
do not capture the impacts the proposed change may have on businesses
participating in various non-procurement programs that apply SBA's
receipts-based size standards, such as exemptions from compliance with
paperwork and other regulatory requirements.
Table 4--Impacts From Changing the Averaging Period for Receipts From 3 Years to 5 Years
----------------------------------------------------------------------------------------------------------------
Firms impacted Total to Total firms
Impact \1\ in matched matched ratio impacted in Total firms in % Impacted
dataset (Table 1) 2018 SAM 2018 SAM
----------------------------------------------------------------------------------------------------------------
Entities other than small under
all NAICS code(s)
Impact (i).................. 914 1.340 1,225 43,444 2.8
Entities small under all NAICS
code(s)
Impact (ii)................. 1,255 1.903 2,389 293,524 0.8
Entities small in some NAICS
code(s) and other than small in
other(s)
Impact (i).................. 1,640 1.241 2,035 9,990 20.4
Impact (ii)................. 1,138 1.241 1,412 9,990 14.1
Total positive impact by impact
type
Impact (i).................. 2,554 .............. 3,260 53,434 6.1
Impact (ii)................. 2,393 .............. 3,801 303,514 1.3
-------------------------------------------------------------------------------
Overall total positive 4,687 .............. 6,690 346,958 1.9
impact \2\.............
----------------------------------------------------------------------------------------------------------------
\1\ Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small
businesses extending small business status.
\2\ Number of firms under total positive impacts refer to the number of unique firms. Some firms could appear in
both impact types and hence individual impacts may not add up to overall impact.
The Economic Census, combined with the Census of Agriculture and
County Business Patterns Reports, provides for each NAICS code
information on the number of total small and large businesses subjected
to a receipts-based size standard. Based on the matched SAM data, SBA
computed percentages of businesses impacted under each impact category
for each NAICS industry subject to a receipts-based size standard. By
applying such percentages
[[Page 66573]]
to the 2012 Economic Census tabulation, SBA estimated the number of all
businesses impacted under each impact type for each NAICS code subject
to a receipts-based size standard. These results are presented in Table
5, ``Impacts from Changing the Averaging Period for Receipts from 3
Years to 5 Years (2012 Economic Census),'' below.
Table 5--Impacts From Changing the Averaging Period for Receipts From 3 Years to 5 Years
[2012 Economic Census]
----------------------------------------------------------------------------------------------------------------
Estimate of
Impact \1\ Total firms impacted firms % Impacted
----------------------------------------------------------------------------------------------------------------
Impact (i)...................................................... 271,505 7,822 2.9
Impact (ii)..................................................... 6,896,633 62,822 0.9
-----------------------------------------------
Overall positive impact..................................... 7,168,138 70,644 1.0
----------------------------------------------------------------------------------------------------------------
\1\ Impact (i) = Current large businesses gaining small business status; and Impact (ii) = Current small
businesses extending small business status.
Currently large or mid-size businesses regaining small business
status would get various benefits as small business concerns, including
access to Federal set-aside contracts, and exemptions from various
compliance and paperwork requirements. With their small business status
extended, advanced small businesses would continue to receive such
benefits for a longer period. However, the change from 3-year average
receipts to 5-year average may also harm some small businesses by
causing them to lose or shorten their small business status in at least
one receipts-based size standard, thereby depriving them of access to
small business assistance, especially Federal set-aside opportunities.
To mitigate such impacts, SBA is allowing businesses to elect either
the 3-year average annual receipts or the 5-year average annual
receipts for 2 years through January 6, 2022. SBA intends to seek
comment on implementation in the Business Loan and Disaster Loan
Programs in a proposed rule through a separate rulemaking.
c. The Baseline
For this new regulatory action modifying an existing regulation
(such as changing the average annual receipts calculation from 3 years
to 5 years), a baseline assuming no change to the regulation (i.e.,
maintaining the status quo) generally provides an appropriate benchmark
for evaluating benefits, costs, or transfer impacts of proposed
regulatory changes and their alternatives.
Based on the 2012 Economic Census special tabulations (the latest
available), 2012 County Business Patterns Reports (for industries not
covered by the Economic Census), and 2012 Agricultural Census
tabulations (for agricultural industries), of a total of about 7.2
million firms in all industries with receipts-based size standards,
about 96 percent are considered small and 4 percent other-than-small
under the 3-year annual receipts average. Similarly, of 346,958
businesses that were subject to at least one receipts-based size
standard and eligible for Federal contracting, 87.5 percent were small
in at least one NAICS code and 12.5 percent other than small in all
NAICS codes.
Based on the data from the Federal Procurement Data System--Next
Generation (FPDS-NG) for fiscal years 2015-2017 (the latest available
when the proposed rule was prepared), on average, about 88,770 unique
firms in industries subject to receipts-based size standards received
at least one Federal contract during that period, of which 83 percent
were small. Businesses subject to receipts-based standards received
$182 billion in average annual Federal contract dollars during that
period, of which nearly $64 billion or about 35 percent went to small
businesses. Of total dollars awarded to small businesses subject to
receipts-based size standards, $45 billion or 71 percent was awarded
through various small business set-aside programs and another 29
percent was awarded through non-set aside contracts.
Table 6, ``Baseline Analysis of Receipts-Based Size Standards,''
below, provides these baseline results. SBA's proposed rule included an
estimate of the number and total dollar amount of loans issued through
the Business Loan Programs and the Economic Injury Disaster Loan (EIDL)
program. These estimates are not presented in this final rule because
SBA intends to issue a separate rulemaking to consider changes to size
eligibility for the Business Loan and Disaster Loan Programs.
Besides set-aside contracting and financial assistance discussed
above, small businesses also benefit through reduced fees, less
paperwork, and fewer compliance requirements that are available to
small businesses through Federal agencies that use SBA's size
standards. However, SBA has no data to estimate the number of small
businesses receiving such benefits. Similarly, due to the lack of data,
SBA is not able to determine impacts the final rule will have on small
businesses participating in other agencies' programs that are subject
to their own size standards based on average annual receipts.
Table 6--Baseline Analysis of Receipts-Based Size Standards
------------------------------------------------------------------------
Measure Value
------------------------------------------------------------------------
Total industries subject to receipts-based standards.... 518
Total firms subject to at least one receipts-based 7.17
standard (million)--2012 Economic Census...............
Total small firms subject to at least one receipts-based 6.9
standard (million)--2012 Economic Census...............
Total small firms subject to at least one receipts-based 96.2
standard as % of total firms--2012 Economic Census.....
Total business concerns in SAM \1\ (as of September 1, 420,381
2018)..................................................
Total business concerns subject to a receipts-based size 346,958
standard in at least one NAICS code \2\ (SAM)..........
Total businesses that are small in at least one NAICS 303,514
code subject to a receipts-based size standard.........
Small business concerns as % of total business concerns 87.5
subject to receipts-based standards (2018 SAM).........
Average total number of unique Eligible vendors getting 126,500
Federal contracts \1\--FPDS-NG (2015-2017).............
Average total number of unique firms with receipts-based 88,770
size standards getting Federal contracts \2\--FPDS-NG
(2015-2017)............................................
[[Page 66574]]
Average total contract dollars awarded to business $182
concerns, subject to receipts-based standards ($
billion)...............................................
Average total small business contract dollars awarded to $63.7
businesses subject to receipts-based standards ($
billion)...............................................
Small business dollars as % of total dollars awarded to 34.9
firms subject to receipts-based standards..............
------------------------------------------------------------------------
\1\ Entities in SAM and FPDS-NG presented above only include business
concerns that can be eligible to qualify as small for Federal
contracting. That is, entities that can never qualify as small (e.g.,
foreign, not-for-profit and government entities) are excluded as they
are not impacted by this rule.
\2\ A business concern could appear in multiple NAICS industries
involving both receipts-based and size standards and those based on
other measures (such as employees). Similarly, a business could be
small in some industries and other-than-small in others.
Businesses that would regain or expand their small business status
can be identified by comparing the estimate of their 5-year receipts
average with the size standard. That is, if the 5-year receipts average
of a firm currently above the size standard is lower than the
applicable size standard, that firm will gain or regain small business
status. To estimate the number of small businesses that would benefit
by having their small business status extended for a longer period or
would be penalized by having their small business status shortened, SBA
considered small businesses whose 3-year average annual receipts was
within 10 percent below their receipts-based size thresholds. Depending
upon whether their annual receipts are growing or declining, small
businesses that are not immediately impacted may be impacted, either
positively (i.e., gaining small business status) or negatively (i.e.,
losing small business status) someday as they continue to grow and
approach the size standard threshold as in the current 3-year averaging
method. However, SBA is not able to quantify such impacts now.
d. Benefits
The most significant benefits to businesses from the change in the
period for calculation of average annual receipts from 3 years to 5
years include: (i) Enabling some mid-size businesses currently
categorized above their corresponding size standards to gain or regain
small business status and thereby qualify for participation in Federal
assistance intended for small businesses, and (ii) allowing some
advanced and larger small businesses close to their size thresholds to
lengthen their small business status for a longer period and thereby
continue their participation in Federal small business programs. These
include Federal procurement programs intended for small businesses.
Federal procurement programs provide targeted, set-aside opportunities
for small businesses under SBA's various business development and
contracting programs, including 8(a)/BD, HUBZone, WOSB, EDWOSB, and
SDVOSB programs. Benefits accruing to businesses gaining and extending
small business status are presented below in Table 7, ``Positive
Impacts of Changing the Averaging Period for Receipts from 3 Years to 5
Years.'' The results in Table 7 pertain to businesses and industries
subject to SBA's receipts-based size standards only.
As shown in Table 7, of 43,444 firms not currently considered small
in any receipts-based size standards, 3,260 (or 7.5 percent) would
benefit from the proposed change by gaining or regaining small business
status under the 5-year receipts average in at least one NAICS industry
that is subject to a receipts-based size standard. Additionally, about
3,800 or 1.3 percent of small businesses within 10 percent below size
standards would see their annual receipts decrease under the 5-year
averaging period, consequently enabling them to keep their small
business status for a longer period.
Using the 2012 Economic Census, SBA estimated that about 7,800 or
2.9 percent of currently large businesses would gain or regain small
business status and more than 62,800 or 0.9 percent of total small
businesses would see their small business status extended for a longer
period as the result of this proposed rule. These results are shown in
Table 7, below.
Table 7--Positive Impacts of Changing the Averaging Period for Receipts From 3 Years to 5 Years
----------------------------------------------------------------------------------------------------------------
Firms
Firms gaining extending Total
Impact of proposed change small small positive
business business impact
status status
----------------------------------------------------------------------------------------------------------------
No. of impacted industries...................................... 372 361 \1\ 420
No. of large firms becoming small or/and small firms extending 3,260 3,801 \2\ 6,690
small business status--SAM (as of Sept 1, 2018)................
Large firms becoming small or/and small firms with extended 7.5 1.3 1.9
small business status as % of total large or/and small firms in
the baseline--SAM (as of Sept 1, 2018).........................
No. of large firms becoming small or/and small firms extending 7,822 62,822 70,644
small business status--2012 Economic Census....................
Large firms becoming small or/and small firms extending small 2.9 0.9 1.0
business status as % of total large or/and small firms in the
baseline--2012 Economic Census.................................
No. of large firms becoming small or/and small firms extending 910 838 \2\ 1,700
small business status for small business contracts (FPDS-NG)...
Additional small business dollars available to newly qualified $961 $133 $1,094
firms or/and current small firms with extended small business
status ($ million).............................................
Additional small business dollars as % total small business 1.5 0.2 1.7
contract dollars in the baseline...............................
----------------------------------------------------------------------------------------------------------------
\1\ Total impact represents total unique industries impacted to avoid double counting as some industries have
large firms gaining small business status and small firms extending small business status.
\2\ Total impact represents total unique firms impacted to avoid double counting as some firms may gain small
business status in at least one NAICS code, while extending small business status in at least one other NAICS
code.
[[Page 66575]]
With more businesses qualifying as small under the 5-year receipts
average, Federal agencies will have a larger pool of small businesses
from which to draw for their small business procurement programs.
Growing small businesses that are close to exceeding the current size
standards will be able to retain their small business status for a
longer period under the 5-year receipts average, thereby enabling them
to continue to benefit from the small business programs.
Based on the FPDS-NG data for fiscal years 2015-2017, as shown in
Table 7, SBA estimates that those newly qualified small businesses
(i.e., large businesses gaining small business status) under this final
rule, if adopted, could receive $961 million in small business contract
dollars annually under SBA's small business, 8(a)/BD, HUBZone, WOSB,
EDWOSB, and SDVOSB programs. That represents a 1.5 percent increase to
total small business contract dollars from the baseline. Additionally,
small businesses could receive approximately $133 million in additional
small business contract dollars because of extension of their small
business status, which is about a 0.2 percent increase from the total
small business contract dollars in the baseline. That is, businesses
gaining or extending small business status could receive about $1.1
billion in additional small business contract dollars, which is a 1.7
percent increase to the total small business dollars in the baseline.
The added competition from more businesses qualifying as small may
result in lower prices to the Federal Government for procurements set
aside or reserved for small businesses, but SBA cannot quantify this
impact. Costs could be higher when full and open contracts are awarded
to HUBZone businesses that receive price evaluation preferences.
However, with agencies likely setting aside more contracts for small
businesses in response to a larger pool of small businesses under the
proposed change, HUBZone firms might actually end up getting more set-
aside contracts and fewer full and open contracts, thereby resulting in
some cost savings to agencies. While SBA cannot estimate such costs
savings, as it is impossible to determine the number and value of
unrestricted contracts to be otherwise awarded to HUBZone firms that
will be awarded as set-asides, such cost savings are likely to be
relatively small as only a small fraction of full and open contracts
are awarded to HUBZone businesses.
Additionally, the newly defined small businesses, as well as those
with a longer small business status, would also benefit from reduced
fees, less paperwork, and fewer compliance requirements but SBA has no
data to quantify this impact.
The change from a 3-year averaging period to a 5-year averaging
period will also address some of the challenges and uncertainties small
businesses face in the open market once they graduate from their small
business status. Small and mid-size businesses experience a
considerable disadvantage in competing for full and open contracts
against large businesses, including the largest in the industry. These
large businesses have several competitive advantages over small and
mid-size firms, including vast past performance qualifications and
experience, strong brand-name recognition, a plethora of professional
certifications, security clearances, and greater financial and
marketing resources. Small and mid-size businesses cannot afford to
maintain these resources, leaving them at a considerable disadvantage.
With contracts getting bigger, one large set-aside contract could
throw a firm out of its small business status, thereby subjecting it to
certain requirements that apply to other-than-small firms, such as
developing subcontracting plans. That firm may not have the
infrastructure, existing business processes, and/or other resources in
place in order to comply with such requirements.
By allowing smaller mid-size companies that have just exceeded the
size threshold to regain small business status and advanced small
businesses close to size standards to prolong their small business
status for a longer period, using the 5-year receipts average can
expand the pool of qualified small firms for agencies to draw from to
meet their small business requirements.
e. The Costs
As stated in the proposed rule, the change enacted under Public Law
115-324 may not always and necessarily benefit every small business
concern. When businesses' annual revenues are declining or when annual
revenues for the latest 3 years are lower than those for the earliest 2
years of the 5-year period, the 5-year average would be higher than the
3-year average, thereby ejecting small businesses out of their small
business status sooner or rendering some small businesses other than
small immediately. Similarly, small businesses that lose their small
business status would have to wait longer to qualify as small again.
Such small businesses would no longer be eligible for Federal small
business opportunities, such as Federal small business contracts and
other Federal benefits (such as reduced fees and exemptions from
certain paperwork and compliance requirements) available to small
businesses. However, the SBA's decision to grant a 2-year transition
period allowing businesses to elect to use either the 5-year receipts
average or the 3-year average receipts will mitigate such impacts. SBA
believes the transition period provides small businesses with enough
time to make a permanent transition to the 5-year averaging method
without facing such impacts.
By enabling mid-size businesses to regain small business status and
lengthening the small business status of advanced and successful larger
small businesses, the final rule may disadvantage smaller small
businesses in more need of Federal assistance than their larger
counterparts in competing for Federal opportunities. SBA frequently
receives concerns from smaller small businesses that they also lack
resources, past performance qualifications and expertise to be able to
compete against more resourceful, qualified and experienced larger
small businesses for Federal opportunities for small businesses. With a
larger pool of businesses qualifying as small, SBA expects Federal
agencies to set aside more contracts to small businesses thereby
expanding opportunities for all small businesses. SBA believes that
overall benefits to small businesses from this rule change outweigh the
costs to small businesses.
Besides having to register in SAM to be able to participate in
Federal contracting and update the SAM profile annually, small
businesses incur no direct costs to gain or retain their small business
status. All businesses willing to do business with the Federal
Government have to register in SAM and update their SAM profiles
annually, regardless of their size status. SBA believes that a vast
majority of businesses that are willing to participate in Federal
contracting are already registered in SAM.
The change to the 5-year receipts average may entail some
additional administrative costs to the Federal Government because more
businesses may qualify as small for Federal small business programs.
For example, there will be more firms eligible for enrollment in the
Dynamic Small Business Search (DSBS) database or in certify.sba.gov;
more firms seeking certification as 8(a)/BD or HUBZone firms or
qualifying for small business, WOSB, EDWOSB, and SDVOSB status; and
more firms applying for SBA's 8(a)/BD and All Small Mentor-
Prot[eacute]g[eacute]
[[Page 66576]]
programs. With an expanded pool of small businesses, it is likely that
Federal agencies will set aside more contracts for small businesses
under the new rule. One may surmise that this might result in a higher
number of small business size protests and additional processing costs
to agencies. However, the SBA's historical data on size protests
actually shows that the number of size protests decreased after an
increase in the number of businesses qualifying as small as a result of
size standards revisions as part of the first 5-year review of size
standards. Specifically, on an annual basis, the number of size
protests dropped from about 600 during fiscal years 2011-2013 (review
of most receipts-based size standards was completed by the end of
fiscal year 2013) to about 500 during fiscal years 2014-2016. However,
with more years of data to be reviewed, 5-year averaging may increase
time needed by size specialists to process a size protest.
Additionally, some Federal contracts may possibly have higher
costs. With a greater number of businesses defined as small under the
5-year averaging method, Federal agencies may choose to set aside more
contracts for competition among small businesses only instead of using
full and open competition. The movement of contracts from unrestricted
competition to small business set-aside contracts might result in
competition among fewer total bidders, although there will be more
small businesses eligible to submit offers under the proposed change.
However, the additional costs associated with fewer bidders are
expected to be minor since, by law, procurements may be set aside for
small businesses under the 8(a)/BD, HUBZone, WOSB, EDWOSB, or SDVOSB
programs only if awards are expected to be made at fair and reasonable
prices.
Costs may also be higher when full and open contracts are awarded
to HUBZone businesses that receive price evaluation preferences.
However, with agencies likely setting aside more contracts for small
businesses in response to the availability of a larger pool of small
businesses under the 5-year receipts average, HUBZone firms might
actually end up getting fewer full and open contracts, thereby
resulting in some cost savings to agencies. However, such cost savings
are likely to be minimal as only a small fraction of unrestricted
contracts are awarded to HUBZone businesses.
f. Transfer Impacts
The change from a 3-year averaging period to a 5-year averaging
period may result in some redistribution of Federal contracts between
businesses gaining or extending small business status and large
businesses, and between businesses gaining or extending small business
status and other existing small businesses. However, it would have no
impact on the overall economic activity since the total Federal
contract dollars available for businesses to compete for will not
change. While SBA cannot quantify with certainty the actual outcome of
the gains and losses from the redistribution of contracts among
different groups of businesses, it can identify several probable
impacts in qualitative terms. With the availability of a larger pool of
small businesses under the proposed change, some unrestricted Federal
contracts may be set aside for small businesses. As a result, large
businesses may lose access to some Federal contracts. Similarly, some
currently small businesses may obtain fewer set-aside contracts due to
the increased competition from some large businesses now qualifying as
small and advanced small businesses remaining small for a longer
period. This impact may be offset by a greater number of procurements
being set aside for all small businesses. With large businesses
qualifying as small and advanced larger small businesses remaining
small for a longer period under the proposed rule, smaller small
businesses could face some disadvantages in competing for set-aside
contracts against their larger counterparts. However, SBA cannot
quantify these impacts.
B. Executive Order 12988
This action meets applicable standards set forth in Sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. This action does
not have retroactive or preemptive effect.
C. Executive Order 13132
For purposes of Executive Order 13132, SBA has determined that this
final rule will not have substantial, direct effects on the States, on
the relationship between the national government and the States, or on
the distribution of power and responsibilities among the various levels
of government. Therefore, SBA has determined that this final rule has
no federalism implications warranting preparation of a federalism
assessment.
D. Executive Order 13563
Executive Order 13563 emphasizes the importance of quantifying both
costs and benefits, reducing costs, harmonizing rules, and promoting
flexibility. A description of the need for this regulatory action and
benefits and costs associated with this action, including possible
distributional impacts that relate to Executive Order 13563, is
included above in the Benefit-Cost Analysis under Executive Order
12866. Additionally, Executive Order 13563, Section 6, calls for
retrospective analyses of existing rules.
Following the enactment of Public Law 115-324, SBA issued a public
notice advising business and contracting communities that SBA must go
through a rulemaking process to implement the new law and that
businesses still must report their receipts based on a 3-year average
until SBA changes its regulations. SBA updated the Small Business
Procurement Advisory Council (SBPAC) at its March 26, 2019, April 23,
2019, and August 26, 2019, meetings about SBA's rulemaking process to
implement Public Law 115-324. On April 18, 2019, SBA also presented an
update on the implementation of Public Law 115-324 at the 2019 Annual
Government Procurement Conference. Through phone calls and emails, SBA
also advised business and contracting communities and other interested
parties about the SBA's process to implement the new law.
Additionally, SBA issued a revised white paper titled ``Small
Business Size Standards: Revised Size Standards Methodology'' and
published a notice in the April 27, 2018, issue of the Federal Register
(83 FR 18468) to advise the public that the document is available for
public review and comments. The Revised Size Standards Methodology
explains how SBA establishes, reviews, and modifies its receipts-based
and employee-based small business size standards. On April 11, 2019,
SBA published a Federal Register Notice (84 FR 14587) advising the
public that the Agency has issued the revised final white paper.
E. Executive Order 13771
This rule is not expected to be an Executive Order 13771 regulatory
action because this rule is not significant under Executive Order
12866.
F. Final Regulatory Flexibility Analysis
Under the Regulatory Flexibility Act (RFA), this final rule may
have a significant economic impact on a substantial number of small
businesses in industries subject to receipts-based size standards. As
described above, this rule may affect small businesses in those
industries seeking Federal contracts and assistance under other Federal
small business programs.
[[Page 66577]]
Immediately below, SBA sets forth a final regulatory flexibility
analysis (FRFA) of this final rule to address 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 businesses to which the
rule will apply?; (3) What are the projected reporting, record-keeping,
and other compliance requirements of the rule?; (4) What are the
relevant Federal rules that may duplicate, overlap, or conflict with
the rule?; and (5) What alternatives will allow the Agency to
accomplish its regulatory objectives while minimizing the impact on
small businesses?
1. What is the need for and objective of the rule?
Recently, Public Law 115-324 amended section 3(a)(2)(C)(ii)(II) of
the Small Business Act by modifying the period for calculating average
annual receipts for prescribing size standards for business concerns in
services industries by an agency without separate statutory authority
to issue size standards from 3 years to 5 years. This final rule
implements the intent of Public Law 115-324 and makes consistent
changes to SBA's definition of annual receipts by amending the SBA's
regulations on the calculation of average annual receipts for all
receipts-based standards from over 3 years to over 5 years, except for
the Business Loan Programs and Disaster Loan Programs.
2. What are SBA's description and estimate of the number of small
businesses to which the rule will apply?
This final rule applies to all small businesses that are subject to
a receipts-based size standard. Based on the 2012 Economic Census
special tabulations, 2012 County Business Patterns Reports, and 2012
Agricultural Census tabulations, of a total of about 7.2 million firms
in all industries with receipts-based size standards to which this
final rule will apply, 6.9 million or about 96.0 percent are considered
small under the 3-year annual receipts average. Of 346,958 total
concerns in SAM 2018 to which the rule will apply, about 303,500 or
87.5 percent were small in at least one NAICS industry with a receipts-
based size standard. Similarly, based on the data from FPDS-NG for
fiscal years 2015-2017, on average, about 88,770 unique firms in
industries subject to receipts-based size standards received at least
one Federal contract during that period, of which 83 percent, or 73,825
were small.
3. What are the projected reporting, record-keeping and other
compliance requirements of the rule?
The final rule changes existing reporting or record-keeping
requirements for small businesses. In reporting receipts to SBA for an
SBA size determination after the final rule's effective date,
businesses will report a 5-year average rather than a 3-year average
which requires minimal effort. To qualify for Federal procurement and a
few other programs, businesses are required to register in SAM and to
self-certify that they are small at least once annually. Therefore,
businesses opting to participate in those programs must comply with SAM
requirements. There are no costs associated with SAM registration or
certification. The change from a 3-year averaging period to a 5-year
averaging period may result in some redistribution of Federal contracts
between businesses gaining or extending small status and large
businesses, and between businesses gaining or extending small status
and other existing small businesses. However, it would have no impact
on the overall economic activity since the total Federal contract
dollars available for businesses to compete for will not change.
4. What are the relevant Federal rules which may duplicate, overlap or
conflict with the rule?
Under section 3(a)(2)(C) of the Small Business Act, 15 U.S.C.
632(a)(2)(C), Federal agencies must use SBA's size standards to define
a small business, unless specifically authorized by statute to do
otherwise. 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 (November 24, 1995)). SBA is not aware of any
Federal rule that would duplicate or conflict with establishing size
standards.
However, the Small Business Act and SBA's regulations allow Federal
agencies to develop different size standards if they believe that SBA's
size standards are not appropriate for their programs, with the
approval of SBA's Administrator (13 CFR 121.903). The Regulatory
Flexibility Act, 5 U.S.C. 601(3), authorizes an Agency to establish an
alternative small business definition, after consultation with the
Office of Advocacy of the U.S. Small Business Administration.
5. What alternatives will allow the Agency to accomplish its regulatory
objectives while minimizing the impact on small entities?
By law, SBA is required to develop numerical size standards for
establishing eligibility for Federal small business assistance
programs. Other than varying size standards by industry and changing
the size measures or changing a measurement period, no practical
alternative exists to the systems of numerical size standards. As
stated elsewhere, the objective of this final rule is to change SBA's
regulations on the calculation of business size in terms of average
annual receipts to implement Public Law 115-324.
This rule is expected to affect a substantial number of small
entities, but the effects are not expected to be significant. However,
to mitigate unintended negative impacts of a 5-year averaging period on
small businesses and to allow small businesses more time to prepare for
a switch to the 5-year receipts average, in this final rule, SBA is
allowing, through January 6, 2022, businesses to elect to calculate
average annual receipts using either a 3-year averaging period or a 5-
year averaging period. SBA also decided that the Business Loan Programs
and Disaster Loan Programs are not included in this final rule and will
instead be considered in a future proposed rule.
G. Paperwork Reduction Act
SBA has determined that as a result of this final rule, an
information collection will need to be revised.
1 . SBA Form 355, Information for Small Business Size
Determination. SBA submitted this information collection to OMB for
approval of the changes described below and received conditional
approval pending any change as a result of public comments. The final
information collection package will be resubmitted to OMB concurrent
with publication of this final rule. Changes have been made to Parts
III and IV of the form to address the change from 3 years to 5 years
for calculating average annual receipts. Other revisions to the form
have been made to delete unnecessary questions, clarify certain
previously approved requests for information, and in some instances, to
request additional information where SBA has determined there is a
programmatic need. As noted in the proposed rule and the OMB
submission, these deletions and clarifications, though not required by
the statute, will alleviate the additional burden posed by changing
from 3 years to 5 years for calculating average annual receipts.
[[Page 66578]]
(a) SBA amended the General Instructions section to define
``concern'' and ``principal stockholders''; state that separate
affiliation rules apply in some of SBA's loan and research programs;
remove obsolete information about industries with special size
standards; state that dormant or inactive firms must be disclosed; and
to include in the certification a statement that accompanying
documentation is true and correct.
(b) In Part 1, SBA clarified that the information relates to the
applicant business; added a checkbox for the firm to identify its
corporate organization structure; required a firm to disclose whether
it is organized for profit; and removed various obsolete or unnecessary
information regarding county/city, purpose of the size determination,
the contracting agency, the business's major products or services and
shares of sales, addresses of owners or officers, and recently
completed mergers. Part 1 was also amended to request ownership
information for owners that are entities until the respondent
identifies the ultimate owners that are natural persons.
(c) In Part II, SBA limited the information requested about
employees to businesses that are being evaluated under an employee-
based size standard.
(d) In Part III, SBA limited the information request about receipts
to businesses that are being evaluated under a receipts-based size
standard. SBA also added two additional lines to the entries for annual
receipts so that a business that has been in business for 5 years can
provide information about its most recently completed 5 fiscal years.
SBA added a question to allow the concern to elect a 3-year average or
a 5-year average during the transition period that ends January 6,
2022.
(e) In Part IV, SBA added that the business must provide
information for any business that the applicant's owner reports on a
Schedule C or Schedule E of the owner's personal tax returns if the
owner or an immediate family member has a controlling interest in the
business; removed the request for addresses of individual owners and
managers; requested ownership information for owners that are entities
until the respondent identifies the ultimate owners that are natural
persons; limited the request for employee information to applicants
being evaluated under an employee-based size standard; limited the
information request for receipts information to applicants being
evaluated under a receipts-based size standard; and added two rows to
the receipts table so that the receipts of acknowledged affiliates are
reported based on a 5-year average.
(f) In Part V, SBA removed requests about acknowledged affiliates
that are covered in Part IV; deleted questions about performance of
work on the contract, financial impact of termination for default, and
specific terms and conditions of the contract; and added a question
about actual or proposed subcontracts between the applicant and any of
its alleged affiliates.
SBA determined that these changes to the Form 355 will not impact
the paperwork burden following the transition period, and it will
remain at 4 hours. The changes require a business in an industry with a
receipts-based size standard, if selecting to use the 5-year average
during the transition period or if certifying after the transition
period, to gather information about the business's 5 prior fiscal years
and complete information about its 5 prior fiscal years and the 5 prior
fiscal years for acknowledged affiliates. However, a business with a
receipts-based size standard will not complete information about its
number of employees. Similarly, a business with an employee-based size
standard will not complete information about its receipts.
Additionally, SBA has removed all requests for the addresses of
individual owners and managers, and deleted 3 questions from Part V.
The title, summary of the amended information collection,
description of respondents, and an estimate of the reporting burden are
discussed below. Included in the estimate is the time for reviewing
instructions, searching existing data, and completing and reviewing
each collection of information.
Title and Description: SBA Form 355, Information for Small Business
Size Determination. The information provided in this form will be used
by SBA for a size determination of a business applying for assistance
available to small businesses under any program administered by this
Agency, except for its SBIC Program which uses SBA Form 480, or at the
request of another Federal agency for purposes of its small business
program.
Need and Purpose: This information collection is necessary for SBA
to, among other things, evaluate the eligibility of an applicant for
SBA's small business programs.
OMB Control Number: 3245-0101.
Description of and Estimated Number of Respondents: This
information will be collected from small businesses seeking an SBA
determination of size. Based on historical information, SBA estimates
this number to be between 500 and 600 each year.
Estimated Response Time: 4 hours.
Total Estimated Annual Hour Burden: 2,000-2,400.
List of Subjects in 13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Individuals with
disabilities, Loan programs--business, Reporting and recordkeeping
requirements, Small businesses.
For the reasons set forth in the preamble, SBA amends 13 CFR part
121 as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
0
1. The authority citation for part 121 continues to read as follows:
Authority: 15 U.S.C. 632, 634(b)(6), 662, and 694a(9).
0
2. Amend Sec. 121.104 by revising the second sentence of paragraph (a)
introductory text and by revising paragraphs (c) and (d)(2) through (4)
to read as follows:
Sec. 121.104 How does SBA calculate annual receipts?
(a) * * * Generally, receipts are considered ``total income'' (or
in the case of a sole proprietorship ``gross income'') plus ``cost of
goods sold'' as these terms are defined and reported on Internal
Revenue Service (IRS) tax return forms (such as Form 1120 for
corporations; Form 1120S for S corporations; Form 1120, Form 1065 or
Form 1040 for LLCs; Form 1065 for partnerships; Form 1040, Schedule F
for farms; Form 1040, Schedule C for other sole proprietorships) * * *
* * * * *
(c) Period of measurement. (1) Except for the Business Loan and
Disaster Loan Programs, annual receipts of a concern that has been in
business for 5 or more completed fiscal years means the total receipts
of the concern over its most recently completed 5 fiscal years divided
by 5. For certifications submitted on or before January 6, 2022, rather
than using the definitions in this paragraph (c), a concern submitting
a certification may elect to calculate annual receipts and the receipts
of affiliates using either the total receipts of the concern or
affiliate over its most recently completed 5 fiscal years divided by 5,
or the total receipts of the concern or affiliate over its most
recently completed 3 fiscal years divided by 3.
(2) Except for the Business Loan and Disaster Loan Programs, annual
receipts
[[Page 66579]]
of a concern which has been in business for less than 5 complete fiscal
years means the total receipts for the period the concern has been in
business divided by the number of weeks in business, multiplied by 52.
(3) Except for the Business Loan and Disaster Loan Programs, where
a concern has been in business 5 or more complete fiscal years but has
a short year as one of the years within its period of measurement,
annual receipts means the total receipts for the short year and the 4
full fiscal years divided by the total number of weeks in the short
year and the 4 full fiscal years, multiplied by 52.
(4) For the Business Loan and Disaster Loan Programs, annual
receipts of a concern that has been in business for three or more
completed fiscal years means the total receipts of the concern over its
most recently completed three fiscal years divided by three. Annual
receipts of a concern which has been in business for less than three
complete fiscal years means the total receipts for the period the
concern has been in business divided by the number of weeks in
business, multiplied by 52. Where a concern has been in business three
or more complete fiscal years but has a short year as one of the years
within its period of measurement, annual receipts means the total
receipts for the short year and the two full fiscal years divided by
the total number of weeks in the short year and the two full fiscal
years, multiplied by 52. For the purposes of this section, the Business
Loan Programs consist of the 7(a) Loan Program, the Microloan Program,
the Intermediary Lending Pilot Program, and the Development Company
Loan Program (``504 Loan Program''). The Disaster Loan Programs consist
of Physical Disaster Business Loans, Economic Injury Disaster Loans,
Military Reservist Economic Injury Disaster Loans, and Immediate
Disaster Assistance Program loans.
(d) * * *
(2) If a concern has acquired an affiliate or been acquired as an
affiliate during the applicable period of measurement or before the
date on which it self-certified as small, the annual receipts used in
determining size status includes the receipts of the acquired or
acquiring concern. This aggregation applies for the entire period of
measurement, not just the period after the affiliation arose. However,
if a concern has acquired a segregable division of another business
concern during the applicable period of measurement or before the date
on which it self-certified as small, the annual receipts used in
determining size status do not include the receipts of the acquired
division prior to the acquisition.
(3) Except for the Business Loan and Disaster Loan Programs, if the
business concern or an affiliate has been in business for a period of
less than 5 years, the receipts for the fiscal year with less than a
12-month period are annualized in accordance with paragraph (c)(2) of
this section. Receipts are determined for the concern and its
affiliates in accordance with paragraph (c) of this section even though
this may result in using a different period of measurement to calculate
an affiliate's annual receipts.
(4) The annual receipts of a former affiliate are not included if
affiliation ceased before the date used for determining size. This
exclusion of annual receipts of such former affiliate applies during
the entire period of measurement, rather than only for the period after
which affiliation ceased. However, if a concern has sold a segregable
division to another business concern during the applicable period of
measurement or before the date on which it self-certified as small, the
annual receipts used in determining size status will continue to
include the receipts of the division that was sold.
* * * * *
0
3. Amend Sec. 121.106 by revising paragraph (b)(4)(ii) to read as
follows:
Sec. 121.106 How does SBA calculate number of employees?
* * * * *
(b) * * *
(4) * * *
(ii) The employees of a former affiliate are not counted if
affiliation ceased before the date used for determining size. This
exclusion of employees of a former affiliate applies during the entire
period of measurement, rather than only for the period after which
affiliation ceased. However, if a concern has sold a segregable
division to another business concern during the applicable period of
measurement or before the date on which it self-certified as small, the
employees used in determining size status will continue to include the
employees of the division that was sold.
0
4. Amend Sec. 121.903 by revising paragraphs (a)(1)(ii) and (iii) to
read as follows:
Sec. 121.903 How may an agency use size standards for its programs
that are different than those established by SBA?
(a) * * *
(1) * * *
(ii) The size of a services concern by its average annual receipts
over a period of at least 5 years, determined according to Sec.
121.104;
(iii) The size of other concerns on data over a period of at least
5 years, determined according to Sec. 121.104; or,
* * * * *
Dated: November 25, 2019.
Christopher M. Pilkerton,
Acting Administrator.
[FR Doc. 2019-26041 Filed 12-4-19; 8:45 am]
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