Infotech and the Law: Size matters under SBA's proposed standards

Devon Hewitt

There are currently 37 size levels that apply to 1,151 industries and 13 subindustry activities in the North American Industry Classification System. Thirty of the standards are based on annual revenue (or "receipts"), five are based on number of employees, and two are based on other measures.

The number of size standards and the variation among them has been criticized as being complex and confusing. For example, there are many differences in the size standards based on annual revenue; in some instances, a specific, revenue-based standard applies only to one or a few industries.

Another criticism is the use of both revenue-based and employee-based measures of size. Under this dual system, a company can qualify as small under one standard but be ineligible for small-business set-aside procurements under others.

This anomaly is especially prevalent in the information technology arena, where companies often provide both goods and services. SBA's size standards for providers of computer and peripheral equipment are based on the number of employees in the business, whereas the standard for providers of computer services is based on annual revenue.

Thus, a particular company's eligibility to bid on a small-business set-aside procurement for computer services and equipment will depend wholly on whether the contracting officer determines that the procurement is primarily for services or equipment, a decision that might be subject to influence from an incumbent offeror with size concerns.

SBA's proposed revamping of the size standards tries to address these criticisms. SBA has retained the standards based on the number of employees at their current levels. The proposed regulations modify these standards by converting those size standards previously based on annual revenue or other measures to an employee-based standard for most industries and SBA programs.

The SBA proposal reduces the 37 size standards to 10. Under the proposal, size standards will range between 50 employees and 1,500 employees, depending on the industry or SBA program.

For a limited number of industries, SBA proposes to establish a maximum average annual revenue amount, referred to as a revenue cap, along with the employee-based size standard. To qualify as small, businesses in these industries must be no greater in size than the employee-based size standard and have average annual revenue less than the revenue cap.

SBA states that the purpose of imposing a revenue cap on these industries is to "prevent businesses from creatively manipulating their employment levels to remain small." Specifically, in this exemption from the proposed standards, SBA targeted those industries in which businesses have greater flexibility in deciding to subcontract work.

Under SBA's size regulations, a subcontractor's employees are not included in the number of employees of a business. However, large businesses might attempt to qualify as small businesses by outsourcing their work forces and competing for work targeted for small businesses. The revenue cap, therefore, provides some assurance that, in these industries, small businesses are qualified to compete for small-business set-aside procurements.

The industries covered by the exemption primarily include construction but also computer design, computer facilities management and other computer-related services. Comments on the proposed rule are due before May 18.

Devon Hewitt is a partner of Government Practices at ShawPittman in McLean, Va. She can be reached at devon.hewitt@shawpittman.com.

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