Being a small business can have its advantages. Federal procurement rules provide that certain contracting opportunities may be set-aside for small business competition. Small businesses also may be exempt from certain procurement provisions, such as subcontracting plan requirements and coverage under Federal Cost Accounting Standards (CAS). Prime and higher-tier subcontractors also are incentivized to use small businesses to meet their small business subcontracting goals under their required subcontracting plans.
However, small businesses only remain small to the extent that they are considered small under applicable North American Industrial Classification Standards (NAICS). Generally, size is calculated based on the size standard applicable to the business’s industry code – average annual gross receipts or average annual number of employees.
Congress passed the Small Business Administration (SBA) Runway Extension Act, Pub. L. No. 115-324, to provide small businesses subject to the average gross receipts size standard a longer runway before they would graduate from their small business status. Prior to the Act, small business rules provided that a small business receipts-based size standard would be calculated based on the business’s three-year average of annual gross receipts. To provide small businesses more time to get ready to graduate from the small business program, the Act provides for a five-year runway. The SBA issued a final rule on January 6, 2020 to implement this part of the Act. Under the rule, there will now be a five-year average of gross receipts standard for all industries that are subject to a receipts-based standard – extending the runway in which a small business can still be considered small so that they have “more time to develop capabilities, strengthen and diversify experience, and build resources,” so that they can compete successfully in unrestricted competitions.
The SBA final rule provides a transitional period, from now until January 6, 2022, during which a small business can choose to calculate its receipts-based size based on a three-year or five-year averaging period. This flexibility is being provided to better assist small businesses in the middle market – growing in revenue, but not yet large – as well as the Federal government which will benefit from the expanded pool of competitors. Excluded from this rule, and subject to future rulemaking, are SBA’s small business loan programs. The SBA also did not address calculation period for the employee-based size standard.
The final SBA rule also addresses the former affiliate rule – the situation in which a small business sells or acquires a segregable division. Under this rule, the gross receipts of the division being sold remain the receipts of the selling concern and do not become the receipts of the acquiring concern. However, where an entity is being sold to a small business, the revenues of that entity are considered part of the small business acquiring the entity for purposes of calculating size.
- If you are a small business you should be considering the impact of this new rule on your size status. Small businesses with revenues approaching their size standard caps may be able to extend their small business status depending on the calculation of their size using a three- or five-year period.
- If you are a prime or higher-tier subcontractor that must comply with small business subcontracting rules, you should seek confirmation of the size status of your applicable or potential subcontractors.
- There have been any number of protests relating to the size of potential bidders, offerors, and awardees. Competitors may be sizing up the competition to see if a challenge to the size of their competition is in order. Where a size challenge may be raised, properly and promptly addressing the matter is essential.
- Stay tuned for future rulemaking on the SBA loan program, and potentially on employee size standard calculations. It is clear that SBA will address loan program matters soon. And, having a three-year period for employee-based size standards and a five-year period for revenue-based standards has an appearance of being unequal. Comments were raised in this area and they may yet be reconsidered.
If you have questions about small business size regulations or potential size challenges, contact Susan Warshaw Ebner or your Stinson counsel.