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Tiered size standards are proposed.

Set-Aside Alert
April 15, 2005

A coalition of minority business organizations is urging SBA to adopt tiered size standards that could allow many larger companies to become eligible for federal small business programs.

Members of the Minority Business Summit Committee presented the proposal in comments on SBA's proposed revision of size standards. Groups endorsing tiered standards include the National Minority Supplier Development Council, the Latin American Management Association and the Association for Small Businesses in Technology.

The Summit Committee proposed a five-tier standard, but its member organizations offered different ideas on how the tiers should be structured. They said the tiered approach would allow growing businesses to continue to qualify for set-aside contracts until they are big enough to compete with corporate giants.

Stephen Denlinger, CEO of the Latin American Management Association, pointed to the current $21 million size standard for firms in the IT services industry. "A small IT firm, with annual sales of $21 million, is still an astonishingly small company in the overall IT industry," he wrote. "Upon exceeding the size standard of $21 million, these extremely small firms are cast out to compete in the IT industry with companies that have sales that are anywhere from 10 times to 300 times their size."

The proposal by the Association for Small Businesses in Technology calls for five tiers, with the top tier based on 10% of the average revenue of the five largest corporations in an industry. If the largest corporations averaged $1 billion in revenue, a small business would be defined as one with up to $100 million in revenue. Under current rules, the largest revenue-based standard is $28.5 million for certain heavy construction categories.

SBA officials have said in the past that they do not intend to increase size standards across the board.

The Commerce Department's COMMITS NexGen government-wide acquisition contract, a small business set-aside, uses a form of tiered standards by grouping companies that are similar in size according to their NAICS codes. Companies then compete for contracts only with others of similar size.

Other commenters said the use of tiered standards could crowd out existing small businesses by making larger companies eligible for set-aside contracts. Lloyd Chapman, president of the American Small Business League, wrote that tiered standards would "further limit opportunities for small businesses."

SBA says the adoption of tiered standards would require congressional approval.

SBA has not yet counted the comments it received in response to its notice of proposed rulemaking, but they number well into the thousands.

The Small Business League generated about 6,000 e-mail messages urging that size standards be based on employment rather than receipts and that there should be no grandfather clause under the new size standards. "'Grandfathering' will allow large businesses to continue to tie up billions of dollars of small business contracts, to the detriment of legitimate small businesses," Chapman wrote.

But other commenters said a grandfather clause is needed to avoid a catastrophic impact on companies that might suddenly lose small-business status under new size standards.

"The single best reason for converting to an employee-based size standard is the fact that the number of employees in a company does not vary with changing economic conditions as radically as do receipts," wrote Michael D. Wheelock, president of Grayback Forestry Inc. in Merlin, OR.

Last year SBA proposed basing size standards on employment, with an additional revenue cap in most service industries, but the proposal was withdrawn in the face of widespread opposition. (SAA, 7/ 9/04) SBA issued a new request for comments in December.

In that notice, the agency said it is still committed to simplifying size standards because it believes the current patchwork of 37 standards, some counting employees and some counting receipts, is unnecessarily complicated.

But the Contract Services Association of America, among others, disagreed: "CSA believes that the current system is not complex or difficult to use and, therefore, should not be changed ... Change for the sake of change is not a reason for throwing small businesses into turmoil."

SBA plans several public meetings around the country to hear comments on the issue. Gary Jackson, assistant administrator for size standards, said the dates and places will be announced shortly.

Two other issues drew a large number of comments, apparently as a result of organized letter-writing campaigns:

SBA asked whether small companies should be eligible for Small Business Innovation Research contracts if they are majority-owned by a large venture capital firm.

It also asked for comment on whether franchisees should qualify as small businesses in all industries.



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