Infotech and the Law: Domino effect hidden in changing size standards

Devon Hewitt

The Small Business Administration has proposed revising its size standards mainly by moving to a system that determines a company's small-business status based solely on the number of employees.

Under current regulations, a company's status is determined either by the number of employees or average annual revenue over the past three years. According to SBA, moving to a single standard will make this system less complex.

Small businesses, however, dispute this. They argue that the proposed rule recognizes that the system has worked well. They also note that any change in the system is likely to cause confusion and uncertainty, as small businesses, particularly government contractors, are already overburdened with the number and extent of regulations with which they must comply. They say SBA's claim of easing the system's complexity is misleading.

Under the proposed rule, the size of most businesses will be determined only on the number of employees they have. But certain businesses will have a revenue cap as well. That is, SBA is proposing a maximum average annual revenue amount as well as a maximum number of employees, to determine the small-business status of some types of businesses.

Consequently, instead of satisfying either standard required under the current rule, these businesses will have to satisfy both under the proposed rule. SBA is trying to minimize the impact of this provision, but it applies to a broad range of industries, including construction and computer-related services, industries in which small businesses often get their start.

Small businesses not only are unhappy with the complexity and confusion SBA's new rule would create, but they also say it would rob many businesses of their current "small" status.

Because the proposed rule does not grandfather small businesses, SBA acknowledged that as many as 1,500 small businesses could lose their eligibility under the new regime. Small businesses charge that SBA has failed to weigh this against the perceived benefits of the proposed rule.

Small businesses depend on their status for revenue and have based their business plans on it. Prime contractors depend on their relationships with small businesses to fulfill their subcontracting requirements. Agencies rely on prime contractors' subcontracts and direct contracts to small businesses to fulfill their own small-business contracting goals.

Thus, immediately eliminating 1,500 companies -- a number many say is conservative -- will have an adverse economic impact that will extend far beyond those businesses.

Small businesses say that SBA is hurting the very constituency it is authorized to serve and argue that, at a minimum, businesses currently qualified as small should maintain that status under the proposed rule.

Small businesses charge that the proposed rule does not achieve the simplification SBA seeks, cuts a significant number of small businesses and indirectly discourages the participation of small business in federal procurement. They claim it ain't broke -- why is anyone fixing it? *

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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