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Advocates taking sides over size standards.

Set-Aside Alert
January 21, 2005

How small is small?

That is the heart of the debate over SBA's planned overhaul of size standards.

Several organizations representing small and minority businesses hope to persuade SBA that size standards for federal procurement should be increased, because businesses competing for federal contracts tend to be larger than the average small firm.

Another group, the California-based American Small Business League, is urging business owners to oppose a "grandfather" clause that would permit businesses currently classified as small to automatically retain their eligibility under the new standards.

SBA issued an advance notice of proposed rulemaking Dec. 3 asking for comments on a number of specific issues relating to the standards. (SAA, 12/17/04) The comment period has been extended until April 3. To see the notice, go to www.regulations.gov and click on "Small Business Administration." The agency also plans public meetings to hear comments before it issues a proposed rule.

SBA is "asking the community, Tell us what to do" in rewriting the standards, said Fernando Galaviz, president of the Association of Small Businesses in Technology in Arlington, VA. "We commend them for it."

"The real issue here is the viability of a small business," he said in an interview. "When is a small business reasonably in a posture to become competitive in the mainstream marketplace?"

SBA has traditionally set size standards by surveying all businesses in a particular industry to determine which ones qualify as small. Galaviz and others argue that size standards should take into account the unique nature of the federal marketplace, which demands a certain amount of heft to compete.

Noting that large corporations are the dominant players in federal procurement, he asked, "How is a $21 million or $50 million firm to compete with a $2 billion firm?"

But the president of the American Small Business League, Lloyd Chapman, has long pushed for action to limit small-business programs to firms that he believes are truly small, such as those with fewer than 100 employees. The League urges SBA to require annual recertification of small businesses to make sure they have not outgrown size standards.

In a letter posted on its website, the League says, "The SBA needs to redirect attention to policies and procedures that direct the flow of federal contracts away from large businesses and back to small firms with less than 100 employees. These true small businesses are the firms that Congress intended to benefit from the Small Business Act when it was passed." Chapman said several hundred firms have used the letter as a model for their comments on the issue. (See www.asbl.com.)

SBA issued a proposed rule last March to revamp its size standards, but withdrew the proposal in July in the face of widespread opposition. (SAA, 7/9/04) The December notice said, "SBA remains committed to modifying its size standards in a manner to make them simpler and easier to use."

Some comments on the proposed rule advocated separate size standards for federal procurement, larger than the standards for SBA's other programs, such as loans. Before 1984 SBA had a separate set of standards for procurement. In its December notice, the agency invited comments on whether it should return to that policy, but SBA officials have said in the past that they did not intend to increase size standards.

Other comments suggested two-tiered size standards for procurement, with the lower dollar-value contracts reserved for very small businesses. Legislation would be needed to create tiered standards, but SBA invited comments on the issue.

SBA's 2004 proposal would have based new size standards on the number of employees rather than a company's revenue, with limits ranging from 50 employees to 1,500, depending on the industry. The rule would have set ceilings on receipts as well as employment in 31 industries, including construction and many services; to be eligible for federal small business programs, a company would have to stay below both the employment and receipts limits.

In its December notice, the agency asked whether it should reconsider that approach and base some or all standards on receipts.

The Defense Department was the driving force in pushing for employment-based standards, saying its contracts are so large that a company can outgrow the current dollar-based standards by winning a single award. But several small-business groups objected that a ceiling on employment would discourage companies from hiring.



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