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Resolving Problems Raised By Critics of Size-Standard Rules Won't Be Easy

Minority Business Insider
July 16, 2004

Reaction is mostly positive to the Small Business Admin.'s decision to pull proposed regulations to change the size-standards system to one based primarily on employment from one based mainly on gross receipts. But the problems cited by commenters won't be easy to resolve.

Several commenters assert the current system isn't broken, and at least one says the rules for determining whether a small firm is affiliated with a large business and therefore ineligible for favorable treatment is the real problem.

About 2,300 of the more than 3,700 comments support a proposal to reduce to 100 from 500 the number of employees a non-manufacturing firm can have to still be considered small. Those commenters do not address the proposed switch to an employment-based system.

It is far from certain SBA's plan for another try with more public input before a rules change is proposed can achieve a more acceptable outcome. This is because there are fundamental conflicts in the objectives of different stakeholders.

On one hand, federal agencies are struggling to meet the statutory procurement goals for small business and various socioeconomic subcategories of ownership. If "small" is defined to include larger companies than current rules permit, it would be easier for the agencies to meet the goals.

The Defense Dept.'s threat to seek legislation changing to an employment-based method produced an interagency task force, eventually leading to the SBA proposal. DoD was finding many small businesses, if they received a DoD contract, would become large businesses in a revenue-based system.

Frank Ramos, director of DoD's OSDBU, praises SBA's effort and says he's confident the final product will meet his agency's needs. Ramos says he is making progress in solving the problem with teaming agreements between small companies to handle large contracts without exceeding the revenue limits.

To translate the revenue-based regime into an employment-based system without making small-business preferences available to obviously large concerns, the SBA size standard experts had to ensure small really was small within a given industry.

The proposed new system would have replaced the current one with 37 size levels, 30 of which are based on average annual receipts, with 10 employee-based categories.

In forecasting the impact of the new system, SBA used 1997 Census data and concluded 35,200 businesses would gain eligibility and 34,100 would lose it for a net gain of 1,100 businesses classified as small. SBA saw this as a positive net effect (MBI, 04-4p3).

But the Office of Advocacy does not.

An analysis provided without charge to OA by Eagle Eye Publishers Inc., a Fairfax, VA, specialist in federal procurement statistics, shows the changes would increase federal spending because firms now considered large would be defined as small. Eagle Eye says companies in the top 25 North American Industrial Classification System codes that set to become employment-based would enjoy a 5% increase in procurement dollars.

" The effect of this may be to crowd out existing small businesses," OA tells SBA in a letter requesting the rules be pulled.

OA says the Regulatory Flexibility Act requires SBA to further examine by industry the impact of the rule change on the 34,100 firms adversely affected by it. This analysis should extend to small nonprofit organizations and small government jurisdictions. Some nonprofits are eligible for micro loans and disaster loans.

One of the most controversial elements of the SBA proposal would have reduced to 100 from 500 the maximum number of employees a non-manufacturing company could have to be considered small.

Lloyd Chapman, the California information-technology executive who has led a campaign to expose large companies falsely claiming to be small, mounted an effort to get companies, chambers of commerce and small towns to write in favor of the change. The result was more than 2,300 comments in favor.

But the Coalition to Preserve Small Business says this would instantly strip small-business status from at least 774 small businesses and SBA did not analyze the impact of this.

Chapman, who has founded the American Small Business League to work for the reversal of government policies and practices, which have hurt small business (see p5), notes Census figures show 98% of the 5.7 million firms with employees had 100 or fewer employees in 2001.

SBA plans to publish an advance notice of proposed rulemaking requesting additional information on issues raised by the comments and it may schedule public hearings.

When SBA made a series of proposals in the early 1980s that led to the adoption of the current size-standard system in 1984, the agency received more than 3,000 comments (MBI, 04-04p3).



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