Important Small Business Issue

Very Important Issue for Small Businesses SBA Size Standards Proposed Change Could Affect Your Business You Must Respond Now! Proposed Size Standards Change Affects Over 60,000 Businesses in the U.S.     IMPORTANT: Respond to the NPC survey by May 10th to be included in our comments to the SBA on behalf of small businesses active in federal procurement markets. Click here to go to the survey now. The Small Business Administration (SBA) has proposed revisions to how it calculates which firms qualify as “small businesses.” These revisions may affect your business.  Please read the details below and then complete our very important small business survey ASAP. Our comments are due to the SBA by May 18, 2004.  We will base our comments on your responses to our survey. I. Overview of the SBA Standards Proposal The Small Business Administration (SBA) has proposed regulations that would significantly change the manner in which the SBA determines whether or not a business is “small.” The SBA is proposing to replace most of the receipts-based small business size standards with an employee-based system. This change would reduce the number of different size standard levels and “simplify” the federal program.   The new size standards would range between 50 and 1500 employees depending on industry.   For a limited number of industries, SBA proposes to establish a maximum average annual receipts amount (referred to as a receipts cap) along with the employee-based size standard. Businesses in those industries that meet the employee-based size standard also cannot exceed a specific receipts cap to qualify as an eligible small business. SBA also proposes the following: (A) Modify the size standard for the Surety Bond Guarantee (SBG) Program by replacing the $6 million size standard with the requirement that the contractor meet the size standard for its primary industry; (B) Extend the 125,000 barrels per calendar day component of the size standard for petroleum refiners beyond federal government procurement to all federal small business programs using SBA's size standards; (C) Eliminate the special size standard based on market share for tire manufacturers that applies to only federal government procurements; (D) Modify three receipts-based size standards and one employee-based size standard for the sale or lease of government property; and (E) Revise the non-manufacturer size standard applicable to federal procurements from 500 employees to 100 employees, the size standard that applies to wholesale trade businesses for all other SBA programs. To view the complete text of the proposal – go to http://www.sba.gov/size/restructurePR.html.  To view the SBA FAQ’s on the proposal, go to http://www.sba.gov/size/FAQrestruct.html. To view a comparison of current size standards with the new proposed standards, go to http://admin.pilieromazzapargament.com/CM/Custom/Size%20Standards%20C omparison.pdf.  (Thank you to Piliero, Mazza and Pargament, PLLC for providing this table as the SBA had no such side by side comparison available for our review.  http://www.pmplawfirm.com/FSL5CS/Custom/TOCResources.asp) The SBA indicates that the major reasons for changing the standards are that: The current number of different standards are confusing and difficult for small businesses to use (although, they have provided an online lookup tool at https://eweb1.sba.gov/naics/dsp_naicssearch2.cfm)   Businesses intentionally misclassify their primary industry activity to apply a higher size standard. The SBA believes that employment is a more stable measure of the size of a business and that by reducing the number of size standards, businesses operating in several different industries will be categorized under one or two employee-based standards rather than a wider array of receipts-based standards. In addition to the employee-based size standards, the SBA proposes a maximum receipts cap on 31 industries. Businesses in these categories would be required to fit within both the employee size standard and the receipts cap. Many of the industries affected by this rule fall within the construction industry, including, for example, New Single-Family Housing Construction (except Operative Builders), New Multifamily Housing Construction (except Operative Builders) and New Housing Operative Builders.  Many of these industries, currently under a $28.5 million size standard, would be required to fall under a 150-employee size standard with a $35 million receipts cap.  The receipts caps were prompted by the SBA’s concern that in certain industries, businesses may be able to circumvent employee size standards by subcontracting a large portion of their work. Although companies subject to the receipts cap may initially benefit from the increase in their receipts-based size standard, they will be subject to an additional restriction not imposed on other small businesses. The proposed regulations would also revise the size standard that nonmanufacturers must meet in order to qualify for requirements to provide manufactured products. The SBA would decrease this size standard from 500 to 100 employees in order to be consistent with the size standard that would apply to the majority of nonmanufacturers under the Wholesale Trade industries (NAICS Sector 42).  The SBA claims that 97% of all wholesalers have fewer than 100 employees, implying that this major decrease would have a minor impact on currently eligible firms.  This decrease is somewhat inconsistent with the SBA’s assertion that the existing employee-based size standards will be retained at their current. The SBA believes that out of approximately 4.4 million businesses categorized in the industries with revised size standards, 35,200 businesses would become eligible small businesses, and 34,100 currently small businesses could lose their status for a net result of 1,110 more eligible businesses.  However, they have not broken these numbers down by industry. II.  Background The Small Business Administration was established with the Small Business Act in 1953 (see SBA History http://www.sba.gov/aboutsba/history.html). Through this act, Congress created the Small Business Administration, whose function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns."  The charter also stipulated that the SBA would ensure small businesses a "fair proportion" of government contracts and sales of surplus property. The Small Business Act states that a small business concern is "one that is independently owned and operated and which is not dominant in its field of operation." The law also states that in determining what constitutes a small business, the definition will vary from industry to industry to reflect industry differences accurately. SBA's Small Business Size Regulations (http://www.sba.gov/size/part121sects.html) implement the Small Business Act's mandate to SBA. SBA's size standards define whether a business entity is small and, thus, eligible for Government programs and preferences reserved for ``small business'' concerns. Size standards have been established for types of economic activity, or industry, generally under the North American Industry Classification System (NAICS). At the SBA, only the Administrator can approve creating or changing size standards. Before this can happen, the Office of Size Standards (OSS) makes recommendations to the SBA’s Size Policy Board.  The Board must concur and recommend approval to the Administrator. The SBA website says, “ Both establishing and modifying size standards involve the examination and analysis of industry structural characteristics and the relative position of firms within an industry in terms of size.”  It continues by indicating that the SBA considers these factors in establishing or reviewing size standards: Industry structure analysis Degree of competition Average firm size Startup cost Entry barriers Distribution of sales and employment by firm size Impact of different size standard levels on the objectives of SBA programs, and Comments from the public on notices of proposed rulemaking It should be noted that the proposal places great emphasis on simplification and preventing firms from seeking to manipulate the system rather than an emphasis on the above factors. Additionally, in the interest of standardizing, the SBA proposal seems to place more emphasis on broadly unifying industries rather than looking at their unique factors – degree of competition, average firm size, etc. III. How Does This Proposal Affect Your Business? It is very important that you study the new list of size standards to determine: Will your firm continue to be considered a “small business” by the SBA?  Or, will your firm lose its small business status --- or gain small business status?   Will there will be an increase or decrease in the number of firms in your industry?   How will the employee cap affect your industry and your business?   Will any of the other changes adversely affect your business?   Do these changes appear to be in keeping with how the SBA should be determining size standards?   Are the reasons provided for making the change with merit? Could there be different solutions to deal with the problems posed?   Since the small business designation is used for other government (and sometimes local programs), will this affect your business in other ways than access to contracts? Please consider the SBA proposal, look at how it will affect your business and your industry, and respond to our survey as soon as possible. You may respond anonymously. However, if you provide your contact information (and your location/industry), we will be able to contact you so that you may be part of our next step and our comments for the SBA. Thank you. National Procurement Council The National Procurement Council is the premiere national trade association for organizations active in procurement markets. To join the National Procurement Council, receive continued news and information and be part of our important work on behalf of small business, click here.