Small Business Size Standards: Inflation Adjustment to Monetary Based Size Standards, 3949-3956 [2016-01410]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 81, Number 15 (Monday, January 25, 2016)]
[Rules and Regulations]
[Pages 3949-3956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01410]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AG60


Small Business Size Standards: Inflation Adjustment to Monetary 
Based Size Standards

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: This rule finalizes, without change, the U.S. Small Business 
Administration's (SBA or Agency) June 12, 2014 interim final rule that 
adjusted monetary small business size standards (i.e., receipts, 
assets, net worth, and net income) for inflation that has occurred 
since the last inflation adjustment in 2008. Specifically, the interim 
final rule increased by 8.73 percent all industry specific monetary 
small business size standards (except the $750,000 receipts based size 
standard for agricultural enterprises established by the Small Business 
Act). The interim final rule also increased by the same rate the 
tangible net worth and net income based alternative size standard for 
the Small Business Investment Company (SBIC) Program and receipts based 
size standards for Sales of Government Property (Other Than 
Manufacturing) and Stockpile Purchases. This final rule adopts those 
increases, without change.

DATES: This rule is effective on January 25, 2016.

FOR FURTHER INFORMATION CONTACT: Carl Jordan, Office of Size Standards, 
(202) 205-6618 or sizestandards@sba.gov.

SUPPLEMENTARY INFORMATION: 

Inflation Adjustment

    SBA's small business size regulations require that the Agency 
examine the impact of inflation on monetary size standards (e.g., 
receipts, tangible net worth, net income, and assets) and make 
necessary adjustments at least once every five years. (13 CFR 
121.102(c)). Accordingly, on June 12, 2014, SBA published an interim 
final rule (IFR) that increased by 8.73 percent all industry specific 
monetary small business size standards (except the $750,000 receipts 
based size standard for agricultural enterprises established by the 
Small Business Act) (79 FR 33647). Previous to the June 12, 2014 
interim final rule, SBA had last updated size standards for inflation 
on August 18, 2008 (see 73 FR 41237 (July 18, 2008)).
    In addition, the Small Business Jobs Act of 2010 (Jobs Act), Public 
Law 111-240, sec. 1344, Sep. 27, 2010, requires SBA to review all size 
standards every five years and make necessary adjustments to reflect 
current industry and Federal market conditions.
    In accordance with the Jobs Act, SBA has completed a review of all 
industry specific monetary based size standards using the latest 
industry and Federal contracting data available. As part of that 
review, SBA did not take into consideration inflation that had occurred 
since 2008. In the IFR, SBA provided reasons for not considering 
inflation as part of the comprehensive review. Specifically, SBA could 
not combine static industry data with the fluctuating inflation during 
the course of the review that produced a series of rules for different 
sectors at different times. Trying to do so would have resulted in 
different inflation factors for different industries, thereby making 
size standards inconsistent among industries.

Summary and Discussion of Public Comments on the June 12, 2014 IFR

    On June 12, 2014, SBA issued an IFR (79 FR 33647), increasing by 
8.73 percent all industry specific monetary small business size 
standards (except the $750,000 receipts based size standard for 
agricultural enterprises established by the Small Business Act). The 
adjustment represented inflation, as measured by the Gross Domestic 
Product (GDP) price index, since the previous inflation adjustment 
published in July 2008. The 8.73 percent increase was applied to 492 
industry specific size standards (487 receipts based and five assets 
based) and three program specific size standards, namely: (1) Tangible 
net worth and net income based alternative size standards for the SBIC 
Program (13 CFR 121.301(c)); (2) Sales of Government Property Other 
Than Manufacturing (13 CFR 121.502); and (3) Stockpile Purchases (13 
CFR 121.512). For the reasons SBA provided in the June 12, 2014 IFR, 
SBA did not increase the tangible net worth and net income based 
alternative size standards for SBA's 504 and 7(a) Loan Programs (13 CFR 
121.301(b)). Increases became effective July 14, 2014.
    The IFR requested comments from the public on SBA's methodology of 
using the GDP price index for adjusting size standards and suggestions 
for alternative measures of inflation, on whether SBA should adjust 
employee based size standards for labor productivity growth and 
technical changes similar to adjusting monetary

[[Page 3950]]

based size standards for inflation, and on changes to program specific 
size standards. SBA received 13 comments, eight of which supported the 
increases. All comments are available at the Federal Rulemaking Portal, 
www.regulations.gov. Below is a discussion of those comments and SBA's 
responses.

Comment on the Inflation Index

    A construction company commented in favor of increasing size 
standards for inflation. The commenter recommended, however, that SBA 
use the Consumer Price Index (CPI), rather than the GDP price index 
that the Agency used.
    SBA response: In the IFR, SBA reviewed various measures of 
inflation and provided an explanation why the Agency selected the GDP 
price index, rather than other indices such as the CPI, as the most 
appropriate measure for adjusting size standards. Moreover, the 
commenter did not provide a convincing justification as to why the CPI 
is a better measure of inflation than the GDP price index. For these 
reasons, SBA is not adopting the commenter's recommendation in this 
final rule, but will consider it in future adjustments.

Comment on Rounding

    While supporting increases to size standards for inflation and 
using the GDP price index, another commenter recommended that SBA round 
the results in increments of $100,000 rather than $500,000. It seemed 
``. . . arbitrary and too generous for some and harmful to others,'' 
the commenter noted. The rounding reduced some size standards by 
$200,000--for example, $27.7 million to $27.5 million--and this will 
have an impact on a lot of companies, the commenter maintained.
    SBA's response: As in the previous inflation adjustments, SBA 
rounded the results to the nearest $500,000 to avoid having too many 
size standards, in light of public criticism that the Agency's size 
standards are overly complicated. Having too many size standards, 
especially with minor differences, can lead to confusion and 
unnecessary complexity in their application. Among the 16 receipts 
based size standards adjusted for inflation, only three ($15 million, 
$20.5 million, and $27.5 million) were reduced by $200,000 due to 
rounding. This is minuscule relative to the adjusted size standards, 
which SBA believes would not cause much harm to businesses. Thus, in 
this final rule, SBA is not readjusting the size standards for 
inflation by rounding them to $200,000. However, SBA will consider 
applying alternative rounding amounts in future adjustments to size 
standards for inflation.

Comment on the SBIC Alternative Size Standard

    Fully supporting size standards increases for inflation, one 
commenter stated that the increase to the Small Business Investment 
Company (SBIC) size standard allows SBICs to effectively deploy capital 
to growing small businesses. The commenter recommended that SBA allow 
automatic, formulaic updates to the size standards based on the GDP 
price index without prior public participation.
    Another commenter supported a greater increase to the tangible net 
worth and net income based alternative size standard that applies to 
the SBIC Program. The commenter argued that the increase should be 
greater because SBA has not increased the alternative size standard for 
the SBIC Program since the 1994 inflation adjustment. For the increase 
in the June 12, 2014 IFR SBA used the GDP price index, which resulted 
in an increase to the SBIC alternative size standard to $19.5 million 
in tangible net worth and $6.5 million in average net income after 
federal income tax, the commenter explained. Furthermore, the commenter 
pointed out that had SBA used the increase in the GDP price index since 
the 1994 adjustment, the resulting size standard would be $26.5 million 
in tangible net worth and $8.8 million in average net income after 
federal income tax. The commenter further contended that Producer Price 
Index (PPI) could be a better index to use for the SBIC Program because 
most of the SBIC investment goes to small manufacturers. PPI, in the 
commenter's opinion, would raise the size standard to $31.3 million in 
tangible net worth and $10.4 million in average net income after 
federal income tax. Finally, the commenter suggested adopting $20 
million in tangible net worth and $7.0 million in average net income 
after federal income tax. The commenter also raised concerns about the 
definition of ``tangible net worth.'' Specifically, the commenter 
pointed out that for the SBIC Program the only intangible element SBA 
deducts from net worth to determine tangible net worth is ``goodwill.'' 
The commenter recommended that the Agency should allow the deduction of 
all intangibles, not just goodwill, in accordance with U.S. generally 
accepted accounting principles (GAAP).
    SBA's response: In any given measurement period, inflation may be 
insignificant or even negative. Given the 8.73 percent rate of 
inflation for the period covered by this rule, SBA believes that a 5-
year review for size standards for inflation is adequate. More 
frequent, smaller increases (or decreases) would lead to confusion in 
applying size standards, particularly in Federal contracting. 
Furthermore, to change size standards SBA must comply with Federal 
rulemaking and the Regulatory Flexibility Act (RFA), which require SBA 
to seek public comment on contemplated changes, as well as comply with 
other laws and Executive Orders to address the impact of regulatory 
changes on small businesses. If inflation is really large, SBA may 
adjust the size standards more frequently than the 5-year interval.
    It should be noted that the subject rule was an IFR, seeking public 
comments, rather than a proposed rule. Therefore, the revised size 
standards in the IFR were effective July 14, 2014. The IFR applied the 
8.73 percent increase for inflation to all size standards across the 
board. Any significant deviation from that would require a separate 
rulemaking action for the SBIC Program. SBA can consider modifying the 
size standard for the SBIC Program in the future, provided that 
relevant data and program needs would support a size standard that is 
different from the one adopted in this rule. The ``tangible net worth'' 
measure of business size applies to the alternative size standards for 
SBA's financial programs. Accordingly, any concerns or issues regarding 
the definition of ``tangible net worth'' are better addressed to SBA's 
Office of Investment and Innovation.
    SBA recognizes that inflation may not impact every industry or 
program equally. SBA's small business size standards apply to a wide 
variety of Federal Government programs, including the SBIC Program, and 
to businesses engaged in multiple industries. Although SBICs may 
support firms in many manufacturing industries, it is not limited to 
the manufacturing sector. For these reasons, SBA uses a broad measure 
of inflation for the entire U.S. economy to determine the most 
appropriate rate of inflation by which to adjust all of its monetary 
size standards. In the IFR, SBA explains in detail why the GDP price 
index, rather than other measures such as the PPI, is the most 
appropriate measure of inflation for adjusting size standards. SBA's 
decisions not to adjust the SBIC alternative size standard from 1994 to 
the 2008 inflation adjustment were dictated by SBIC's programmatic 
considerations. Because the $20 million tangible net worth and $7 
million net income size standards recommended by the commenter are very 
close to SBA's

[[Page 3951]]

inflation adjusted levels of $19.5 million tangible net worth and $6.5 
million net income published in the IFR, SBA is not making any change 
in this final rule.

Comments on the Dredging Size Standard

    SBA received six comments on the size standard for the Dredging and 
Cleanup Services exception under NAICS 237990, Other Heavy and Civil 
Engineering Construction. The June 12, 2014 IFR increased the size 
standard for Dredging and Cleanup Services from $25.5 million to $27.5 
million in average annual receipts. Four of the six commenters strongly 
supported the increase, while two opposed it. The four commenters 
supporting the increase maintained that the increase is vital to 
account for the escalating costs of labor, equipment, and equipment 
maintenance. They also stated that it will allow firms that grew 
because of the costs of inflation to remain small and eligible for 
Federal procurement opportunities for small businesses.
    One of the commenters supporting the increase to the dredging size 
standard for inflation suggested that SBA take the four largest costs 
on dredging projects (i.e., fuel, labor, insurance and equipment costs) 
into account to calculate the inflation index for the dredging size 
standard. Arguing that dredging costs have increased more than the GDP 
price index, the commenter requested that the size standard for 
dredging be raised to $30 million.
    Two dredging contractors, on the other hand, stated that the 
increase is unjustified, and strongly oppose it. They argued that the 
recent increase to the dredging size standard accounted for 
inflationary factors and was sufficiently substantial to offset any 
need for an adjustment for inflation. One opined that a reasonable 
amount of time should lapse prior to increasing the size standard 
again. Representing a large marine construction and dredging 
contractor, another commenter argued that the increase to the dredging 
size standard reduces his company's (and presumably other similar 
businesses) potential bid market while enhancing the market power of 
the ``big smalls,'' allowing them to dominate the ``small smalls'' 
further. The commenter maintained that fuel prices are actually down 
while newer engines burn less fuel. Advances in automation, reduced 
plastic pipe prices, and improved engine metallurgy are a few examples 
of improved cost efficiencies a firm must adopt to stay competitive, 
the commenter added.
    SBA's response: On July 18, 2012, as part of SBA's comprehensive 
review of size standards under the Jobs Act, SBA had proposed to 
increase the size standard for the Dredging and Surface Cleanup 
Activities exception under NAICS 237990 from $20 million to $30 million 
in average annual receipts (77 FR 42197). SBA received several comments 
against the proposed increase. After reviewing comments and 
reevaluating the relevant industry data, the Agency adopted a $25.5 
million size standard in the final rule (78 FR 77334 (December 23, 
2013)). In the June 12, 2014 IFR, it was increased to $27.5 million for 
inflation. Adjustments in the IFR are in addition to revisions that 
were part of SBA's ongoing comprehensive size standards review. SBA's 
comprehensive size standards review primarily focused on industry 
structure (i.e., average firm size, startup costs and entry barriers, 
industry concentration, and distribution of firms by business size) and 
Federal contracting trends. It did not consider the impacts of 
inflation on size standards.
    For the comprehensive review, SBA reviewed size standards on a 
Sector by Sector basis over a period of several years. Including 
inflation in the analysis would have meant applying different inflation 
rates to different sectors. Specifically, the amount of inflation 
adjustment would be lower for sectors reviewed earlier in the cycle and 
higher for those reviewed later, resulting in inconsistent size 
standards across sectors and industries. To avoid this, SBA decided to 
review all monetary based size standards for inflation separately at 
one time upon completion of the review of all monetary based industry 
size standards.
    In the IFR, SBA increased all monetary based industry size 
standards by 8.73 percent across the board for inflation, including 
those that were increased more substantially than the dredging size 
standard under the comprehensive review. SBA's regulations require that 
the Agency examine the impact of inflation on size standards at least 
once every five years and adjust them as needed. Five years had passed 
between the current inflation adjustment and the previous adjustment 
issued in July 2008. A majority of the commenters argued that the 
increase in the dredging size standard is warranted given the increases 
in fuel, labor, insurance and equipment costs. Moreover, based on the 
Federal procurement data for fiscal years 2012-2014, no additional 
dredging firms would gain small business status under the adjusted size 
standard, suggesting that there would be very minimal impact, if any, 
on firms below the previous $25.5 million size standard. For these 
reasons, SBA is adopting $27.5 million in average annual receipts as 
the size standard for Dredging and Surface Cleanup Activities exception 
under NAICS 237990, as published in the IFR.

Comment on the Size Standard for Architectural Services

    An association representing architects expressed concerns that the 
increase in size standard for Architectural Services (NAICS 541310) 
from $7.0 million to $7.5 million will pose additional burdens on small 
architecture firms and does not reflect the current business 
environment in the profession.
    The association stated that the SBA's February 10, 2012 final rule 
on Sector 54 (Professional, Technical and Scientific Services) notes 
that ``the Administration's goal is to increase the size standard 
participation to 42 percent of each applicable industry.'' The 
association stated that under the current $7 million size standard for 
architecture, over 95.5 percent of firms qualify as small businesses, 
more than double the goal, and raising it to $7.5 million will increase 
that to 96 percent. The association maintained that there have been 
significant deflationary pressures on the cost of design and 
construction projects due to the economic crisis, fewer projects, and 
increased competition. There has not been sufficient inflation in the 
sector to justify increasing the size standard, the association added. 
The association further maintained that the size standard does not 
reflect the way architects conduct business. For example, an architect 
may have to hire engineers to complete building projects, and in some 
cases, similar to travel agencies, an architectural firm can pass 
through up to 50 percent of its fees to subcontractors, the association 
added.
    The association concluded that additional increase to the size 
standard will hurt small businesses by allowing larger firms with 
greater resources and marketing dollars to push out smaller firms 
without those resources.
    SBA's response: To account for inflation that occurred since the 
previous inflation adjustment of July 2008, in the June 12, 2014 IFR, 
SBA increased the size standard for NAICS 541310 (Architectural 
Services) from $7 million to $7.5 million in average annual receipts. 
As part of SBA's comprehensive size standards review, on March 16, 
2011, SBA had issued a proposed rule to increase the size standard for 
NAICS 541310 and other industries under NAICS Industry Group 5413 
(Architectural, Engineering, and

[[Page 3952]]

Related Services) from $4.5 million to $19 million in average annual 
receipts (76 FR 14323). SBA received significant adverse comments to 
the proposed increase. After weighing the comments and reevaluating the 
relevant industry and Federal contracting data, SBA adopted $7 million 
as the size standard for NAICS 541310 (77 FR 7490 (February 10, 2012)). 
As stated elsewhere in this final rule and explained in the IFR, for 
the comprehensive review, size standards were evaluated against the 
latest industry and contracting factors, but not against the inflation 
that occurred since the previous inflation adjustment in July 2008.
    The association's statement that in the February 10, 2012 final 
rule SBA noted that the Administration's goal is to increase the size 
standard participation to 42 percent of each applicable industry is not 
correct. SBA has not established such a goal. For the majority of 
industries the current size standards include 90-95 percent of firms as 
small, and in some industries more. Thus, the size standard for 
architects including 95-96 percent of firms as small is not 
inconsistent with most other industries. Moreover, although the $7.5 
million size standard for architectural services includes 95-96 percent 
of firms, it includes less than 50 percent of total industry receipts 
and less than 30 percent of Federal contracting dollars.
    SBA does not agree with the argument that, because architectural 
firms subcontract up to 50 percent of their work to other disciplines, 
the receipts based size standard does not reflect the industry. In 
response to the comments on the March 16, 2011 proposed rule that SBA 
should allow architectural firms to exclude subcontracting costs when 
calculating the receipts, SBA provided in the February 10, 2012 final 
rule (see page 7502) an extensive explanation of how the Agency 
calculates receipts and what a company can and cannot exclude from the 
revenue computation.
    More importantly, it should be noted that the business model of 
architectural firms is not comparable with that of travel agencies. A 
travel agency may collect the full value of a cruise, flight, etc., 
from its customers, but must remit most of those funds to the provider 
of the services sold. It retains only a small commission or fee and 
never has any rights to the balance of the funds it collects. Those 
funds do not increase the travel agency's asset base and are not 
available to reduce its liabilities. On the other hand, receipts an 
architectural firm collects can be used to replenish inventory, pay 
employees and other subcontracting costs, reduce payables and debt, pay 
bonuses, and for other business purposes. They add to the business' 
asset base and net worth, and reduce liabilities. Further, the Economic 
Census data that SBA uses in determining size standards include these 
various costs as part of a company's gross receipts. Accordingly, SBA's 
small business size regulations (13 CFR 121.104) continue to state, ``. 
. . subcontractor costs, reimbursements for purchases a contractor 
makes at a customer's request, and employee-based costs such as payroll 
taxes, may not be excluded from receipts.''
    SBA also does not agree with the association's argument that an 
additional increase to the size standard will hurt small businesses by 
allowing larger firms with greater resources to push out smaller firms 
without those resources. First, it did not provide any data or analysis 
to support the argument. Second, the data from the Federal Procurement 
Data System--Next Generation (FPDS-NG) do not suggest that the increase 
in the size standard for architectural services from $4.5 million to $7 
million in 2012 has hurt firms below the prior $4.5 million size 
standard. For example, during fiscal years 2010-2011 (i.e., prior to 
the size standard increase), firms below $4.5 million received about 25 
percent of total Federal contract dollars awarded under NAICS 541310. 
Firms under $4.5 million still accounted for 25 percent of total 
contract dollars during fiscal years 2013-2014 (i.e., after the size 
standard increase), despite a 33 percent decline in total Federal 
dollars in that NAICS code as compared to fiscal years 2010-2011. 
Moreover, during fiscal years 2013-2014 (i.e., under the $7 million 
size standard) firms below $4.5 million accounted for 85 percent of 
total dollars awarded to small businesses, as compared to only about 4 
percent going to firms from $4.5 million to $7 million. Based on these 
trends, SBA does not expect an increase to the size standard by 
$500,000 to cause much harm to and burden on firms below $4.5 million.

Comment on the Size Standards for NAICS Subsector 562

    An elected official also commented on the interim final rule with 
questions on the rate of increase in the size standards for NAICS 
Subsector 562, Waste Management and Remediation Services. First, the 
commenter asked whether the rate of increase in the size standards for 
waste management service businesses reflects a similar increase in the 
GDP inflation rate and if not, what factors have been used to justify a 
larger increase. Second, the commenter asked, if there is a 
discrepancy, whether the amount of the increase comported with SBA's 
own protocol used in other business increases. Third, the commenter 
asked whether there was a large discrepancy in size of businesses in 
this category or rates of inflation between regions of the country, and 
if so whether these discrepancies are significant enough to warrant 
region-specific NAICS size rules.
    SBA's response: The rate of increase that SBA applied to adjust 
size standards in NAICS Subsector 562 reflects the same GDP price index 
rate that the Agency applied to all monetary based small business size 
standards. Inflation based on the GDP price index increased 8.73 
percent from the first quarter of 2008 to the fourth quarter of 2013. 
As in the previous inflation adjustments, SBA also used the GDP price 
index in the latest inflation adjustment, because, as explained in the 
interim final rule, for purposes of small business size standards it is 
the most comprehensive measure of movement in the general price level 
in the economy. As part of the comprehensive size standards review 
under the Jobs Act, on December 6, 2012, SBA published a final rule 
increasing several size standards in NAICS Subsector 562 (77 FR 72691). 
The increases in size standards in NAICS Subsector 562 for inflation 
are in addition to the increases SBA adopted under the comprehensive 
review.
    SBA establishes small business size standards only on a nationwide 
basis. SBA believes it would be unmanageable to establish and use size 
standards if they were established on a regional basis. First, the data 
SBA uses to review or update size standards are generally limited to 
the national level. Second, size standards are used to determine 
eligibility for various Federal programs, including Federal Government 
contracting, and SBA loan programs. If the size standards were to vary 
by geographic region, it would be very difficult to use them. For 
example, it would be difficult to determine what size standards to 
apply when businesses located in one region bid for Federal work to be 
performed in another region. Similarly, it would be difficult to 
determine eligibility for an SBA loan when a firm has operations in 
more than one region.

General Comment on Size Standards Increases

    Another commenter stated that 98 percent of businesses (including 
non-employer firms) are ``truly small'' having only 1-19 employees. The

[[Page 3953]]

commenter noted, correctly, that SBA leaves non-employer firms out of 
its statistics. The commenter claimed that the average size of SBA's 
loan increased from $182,000 in 2008 to $547,000 in 2013, while the 
share of loans under $100,000, which he claims generally go to truly 
small businesses, decreased from 24 percent to 9 percent. The commenter 
used these statistics to argue that the expansion of small business 
size definitions has allowed large corporations to qualify as small, 
resulting in significantly larger loans to a few, elite larger 
corporations. The commenter cited the European Union and Australian 
small business definitions and other definitions used by the U.S. 
Congress (e.g., 25 and 50 employees), and stated that SBA's size 
standards now include 99 percent of employer firms and 99.4 percent of 
all firms.
    SBA's response: SBA acknowledges that some of its size standards 
could include as much as 97 percent to 99 percent of firms in a given 
industry. However, it is very important to point out that while it may 
appear to be a large segment of an industry in terms of the percentage 
of firms, small firms in those industries represent only about a third 
of total industry receipts and less than 25 percent of Federal 
contracting dollars.
    What constitutes a small business in other countries does not apply 
and has no relevance to SBA's small business definitions and U.S. 
Government programs that use them. Depending on their economic and 
political realities, other countries have their own programs and 
priorities that can be very different from those in the U.S. 
Accordingly, small business definitions other countries use for their 
Government programs can be vastly different from those established by 
SBA for U.S. Government programs. From time to time, the U.S. Congress 
has used different thresholds, sometimes below the SBA's thresholds, to 
define small firms under certain laws or programs, but those thresholds 
apply only to those laws and programs and generally are of no relevance 
to SBA's size standards. SBA establishes size standards, in accordance 
with the Small Business Act, for purposes of establishing eligibility 
for Federal small business procurement and financial assistance 
programs. The primary statutory definition of a small business is that 
the firm is not dominant in its field of operation. Accordingly, rather 
than representing the smallest size within an industry, SBA's size 
standards generally designate the largest size that a business concern 
can be relative to other businesses in the industry and still qualify 
as small for Federal Government programs that provide benefits to small 
businesses.
    SBA does not agree that increases in average loan amounts and 
decreases in smaller loans are solely due to the increases in size 
standards for two reasons. First, with the passage of the Jobs Act in 
2010, Congress increased the limits for SBA's 7(a) loans from $2 
million to $5 million, for CDC/504 loans from $1.5 million to $5.5 
million, and for 7(a) express loans from $300,000 to $1 million. 
Second, at the same time, Congress also increased the tangible net 
worth and net income limits of the alternative size standard from $8.5 
million and $3 million to $15 million and $5 million, respectively. 
Under the alternative size standard, businesses that are above their 
industry size standards can qualify for SBA's loans. These statutory 
changes may be important factors for the purported changes in SBA's 
lending. However, such changes do not necessarily mean that truly small 
businesses are getting fewer loans now than in 2008. In fact, 
businesses with less than 10 employees received a total of $12.1 
billion in loans through SBA's 7(a) and 504 Loan Programs in 2014, as 
compared to $10.6 billion in 2008. That was in increase of more than 14 
percent.

Conclusion

    With due consideration of all public comments as discussed above, 
in this final rule, SBA is adopting the increases in all industry 
specific monetary size standards for inflation, as published in the 
IFR. SBA is also adopting the increases in three program specific size 
standards, namely the SBIC Program, Sales of Government Property (Other 
Than Manufacturing), and Stockpile Purchases. Similarly, SBA is also 
deleting references to the Surety Bond Guarantee size standards for 
contracts awarded in 2005 in the Presidentially declared disaster areas 
following Hurricanes Katrina, Rita, and Wilma, and the determination 
date for eligibility under the Agency's Economic Injury Disaster Loan 
(EIDL) Program in connection with the same 2005 hurricanes, as 
published in the IFR.
    Accordingly, SBA is issuing this final rule to adopt, without 
change, the interim final rule published on June 12, 2014.

Compliance With Executive Orders 12866, 13563, 12988, and 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612) and the Paperwork 
Reduction Act (44 U.S.C. Ch. 35)

Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
final rule is not a ``significant regulatory action'' for purposes of 
Executive Order 12866. To help explain the need for this rule and the 
rule's potential benefits and costs, SBA provided a Cost Benefit 
Analysis in the June 14, 2014 interim final rule. This is also not a 
``major rule'' under the Congressional Review Act (5 U.S.C. 800).

1. Is there a need for the regulatory action?

    SBA's statutory mission is to aid and assist small businesses 
through various financial, procurement, business development, and 
advocacy programs. To assist the intended beneficiaries of these 
programs effectively, SBA must establish distinct definitions of which 
businesses are deemed small businesses. The Small Business Act (15 
U.S.C. 632(3)(a)) (Act) delegates to the SBA Administrator the 
responsibility for establishing small business definitions. The Act 
also requires that small business definitions vary to reflect industry 
differences. The supplementary information to this final rule explains 
the approach SBA follows when adjusting size standards for inflation. 
Based on the rise in the general level of prices, SBA believes that an 
inflation adjustment to size standards is necessary to reflect small 
businesses in industries with monetary size standards.

2. What are the potential benefits and costs of this regulatory action?

    The most significant benefit to businesses of this final rule is to 
enable those that have exceeded size standards simply due to inflation 
to regain eligibility for Federal small business assistance programs. 
This will also help businesses to retain small business eligibility for 
Federal programs for a longer period. These programs include SBA's 
financial assistance programs, economic injury disaster loans, and 
Federal procurement programs intended for small businesses. Federal 
agencies use SBA's 8(a) Business Development Program, Historically 
Underutilized Business Zones (HUBZone), Women-owned Small Businesses 
(WOSB), Economically Disadvantaged Women-owned Small Businesses 
(EDWOSB), and Service-disabled Veteran-owned Small Businesses (SDVOSB) 
Programs

[[Page 3954]]

to provide contracting opportunities for qualified small businesses. 
Federal agencies also use SBA's size standards for other regulatory and 
program purposes. These programs assist small businesses to become more 
knowledgeable, stable, and competitive. SBA estimates that this rule 
will enable approximately 8,500 firms in industries with receipts based 
size standards and about 170 firms in industries with assets based size 
standards, currently above SBA's size standards, to gain small business 
status and become eligible for these programs. This will increase the 
small business share of total receipts in industries with receipts 
based size standards from 31.2 percent to 31.8 percent and the small 
business share of total assets in industries with assets based size 
standards from 8.8 percent to 9.4 percent.
    Three groups will benefit from the revisions of size standards in 
this rule: (1) Some businesses that are above the current size 
standards may gain small business status under the higher, inflation-
adjusted size standards, thereby enabling them to participate in 
Federal small business assistance programs; (2) growing small 
businesses that are close to exceeding the current size standards will 
be able to retain their small business status under the higher size 
standards, thereby enabling them to continue their participation in the 
programs; and (3) Federal agencies that will have a larger pool of 
small businesses from which to draw for their small business 
procurement programs.
    Based on the FPDS-NG data for fiscal years 2012-2014, SBA estimates 
that firms gaining small business status under the inflation adjusted 
size standards could receive Federal contracts totaling $150 million to 
$175 million annually under SBA's small business, 8(a), SDB, HUBZone, 
WOSB, EDWOSB, and SDVOSB Programs, and unrestricted procurements. The 
added competition for many of these procurements can also result in 
lower prices to the Government for procurements reserved for small 
businesses, but SBA cannot quantify this benefit.
    Based on the fiscal years 2012-2014 data, SBA estimates about 70 
additional loans totaling about $30 million could be made to these 
newly defined small businesses under SBA's 7(a) and 504 Loan Programs 
under the adjusted size standards. Increasing the size standards will 
likely result in more guaranteed loans to small businesses in these 
industries, but it is impractical to try to estimate the exact number 
and total amount of loans. There are two reasons for this: (1) Under 
the Jobs Act, SBA can now guarantee substantially larger loans than in 
the past; and (2) as described above, the Jobs Act established an 
alternative size standard ($15 million in tangible net worth and $5 
million in net income after income taxes) for business concerns that do 
not meet the size standards for their industry. Therefore, SBA finds it 
difficult to quantify the actual impact of these inflation adjusted 
size standards on its 7(a) and 504 Loan Programs.
    Newly defined small businesses will also benefit from SBA's 
Economic Injury Disaster Loan (EIDL) Program. Since this program is 
contingent on the occurrence and severity of a disaster in the future, 
SBA cannot make a meaningful estimate of this impact.
    In addition, newly defined small businesses will also benefit 
through reduced fees, less paperwork, and fewer compliance requirements 
that are available to small businesses through the Federal Government.
    To the extent that those nearly 8,700 additional small firms could 
become active in Federal procurement programs, the adjusted size 
standards in this final rule may entail some additional administrative 
costs to the Government as a result of more businesses being eligible 
for Federal small business programs. For example, there will be more 
firms seeking SBA's guaranteed loans, more firms eligible for 
enrollment in the System of Award Management (SAM) database, and more 
firms seeking certification as 8(a) or HUBZone firms or qualifying for 
small business, WOSB, EDWOSB, SDVOSB, and SDB status. Among those newly 
defined small businesses seeking SBA's assistance, there could be some 
additional costs associated with compliance and verification of small 
business status and protests of small business status. However, SBA 
believes that these added administrative costs will be minimal because 
mechanisms are already in place to handle these requirements.
    In some cases, Federal Government contracts may have higher costs. 
With a greater number of businesses defined as small, Federal agencies 
may choose to set aside more contracts for competition among small 
businesses, rather than using full and open competition. The movement 
from unrestricted to small business set-aside contracting might result 
in competition among fewer total bidders, although there will be more 
small businesses eligible to submit offers. However, the additional 
costs associated with fewer bidders are expected to be minor since, by 
law, procurements may be set aside for small businesses, or set aside 
for competition among 8(a), HUBZone, WOSB, EDWOSB, or SDVOSB Program 
participants only if awards are expected to be made at fair and 
reasonable prices. In addition, there may be higher costs when more 
full and open contracts are awarded to HUBZone businesses that receive 
price evaluation preferences.
    The size standards adjustments in this final rule may have some 
distributional effects among large and small businesses. Although SBA 
cannot estimate with certainty the actual outcome of the gains and 
losses among small and large businesses, it can identify several 
probable impacts. There may be a transfer of some Federal contracts to 
small businesses from large businesses. Large businesses may have fewer 
Federal contract opportunities as Federal agencies decide to set aside 
more contracts for small businesses. In addition, some Federal 
contracts may be awarded to HUBZone concerns instead of large 
businesses since these firms may be eligible for a price evaluation 
preference for contracts when they compete on a full and open basis.
    Similarly, some businesses defined as small under the current size 
standards may obtain fewer Federal contracts due to the increased 
competition from more businesses defined as small under the proposed 
size standards. This transfer may be offset by a greater number of 
Federal procurements set aside for all small businesses. The number of 
newly defined and expanding small businesses that are willing and able 
to sell to the Federal Government will limit the potential transfer of 
contracts from large and currently defined small businesses. SBA cannot 
estimate the potential distributional impacts of these transfers with 
any degree of precision.
    The revisions to the current monetary based industry size standards 
for 481 industries and 11 ``exceptions'' and to the monetary based size 
standards for other specific programs are consistent with SBA's 
statutory mandate to assist small business. This regulatory action 
promotes the Administration's objectives. One of SBA's goals in support 
of the Administration's objectives is to help individual small 
businesses succeed through fair and equitable access to capital and 
credit, Government contracts, and management and technical assistance. 
Reviewing and modifying size standards, when appropriate, including 
periodic inflation adjustments, ensure that intended beneficiaries have 
access to small business programs designed to assist them.

Executive Order 13563

    A description of the need for this regulatory action and benefits 
and costs

[[Page 3955]]

associated with this action including possible distributions impacts 
that relate to Executive Order 13563 is included above in the Cost 
Benefit Analysis under Executive Order 12866.
    In an effort to engage interested parties in this action, SBA gave 
appropriate consideration to all input, suggestions, recommendations, 
and relevant information obtained from industry groups, individual 
businesses, and Federal agencies in preparing this final rule.
    The review of size standards in industries and financial assistance 
programs covered in this final rule is consistent with Executive Order 
13563, Section 6, calling for retrospective analyses of existing rules. 
The last inflationary adjustment of monetary based size standards 
occurred in July 2008.
    In addition to the inflationary adjustment of monetary based size 
standards published in the June 12, 2014 interim final rule, as part of 
the comprehensive size standards review, SBA reviewed all the receipts 
and assets based industry size standards and made necessary adjustments 
to ensure that they reflect current industry and market conditions.

Executive Order 12988

    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Executive Order 13132

    For purposes of Executive Order 13132, SBA has determined that this 
final rule will not have substantial, direct effects on the States, on 
the relationship between the national Government and the States, or on 
the distribution of power and responsibilities among the various levels 
of government. Therefore, SBA has determined that this final rule has 
no federalism implications warranting preparation of a federalism 
assessment.

Paperwork Reduction Act

    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA has determined that this final rule will not impose any new 
reporting or recordkeeping requirements.

Final Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this rule may have a 
significant impact on a substantial number of small businesses in the 
industries covered by the rule. As described above, this rule may 
affect small businesses seeking Federal contracts, loans under SBA's 
7(a), 504 and Economic Injury Disaster Loan Programs, and assistance 
under other Federal small business programs.
    Immediately below, SBA sets forth a final regulatory flexibility 
analysis (FRFA) of this rule addressing the following questions: (1) 
What are the need for and objective of the rule? (2) What are SBA's 
description and estimate of the number of small businesses to which the 
rule will apply? (3) What are the projected reporting, recordkeeping, 
and other compliance requirements of the rule? (4) What are the 
relevant Federal rules that may duplicate, overlap, or conflict with 
the rule? and (5) What alternatives will allow the Agency to accomplish 
its regulatory objectives while minimizing the impact on small 
businesses?

1. What are the need for and objective of the rule?

    As discussed in the supplemental information, the revision to the 
monetary based size standards for inflation more appropriately defines 
small businesses. This final rule restores small business eligibility 
in real terms to businesses that have grown above the size standard due 
to inflation rather than due to increased business activity. A review 
of the latest inflation indexes indicates that inflation has increased 
sufficiently to warrant an increase to the current monetary based size 
standards.
    Section 3(a) of the Small Business Act (15 U.S.C. 632(3)(a)) gives 
SBA the authority to establish and change size standards. Within its 
administrative discretion, SBA implemented a policy in its regulations 
to review the effect of inflation on size standards at least once every 
five years (13 CFR 121.102(c)) and make any changes as appropriate. As 
discussed in the supplementary information, inflation has increased at 
a sufficient level since the time of the 2008 final rule to warrant a 
further adjustment to size standards at this time.

2. What are SBA's description and estimate of the number of small 
businesses to which the rule will apply?

    SBA estimates that about 8,500 additional firms will become small 
because of increased receipts based size standards of 476 industries 
and 11 ``exceptions.'' That represents 0.2 percent of total firms that 
are small under current monetary based size standards. This will result 
in an increase in the small business share of total industry receipts 
in those industries from 31.2 percent under the current size standards 
to 31.8 percent under the inflation-adjusted size standards. Due to the 
adjustment of assets based size standards in five industries, about 170 
additional firms will gain small business status in those industries. 
This will increase the small business share of total assets in those 
industries from 8.8 percent to 9.4 percent. The size standards adopted 
in this final rule will enable businesses that have exceeded the size 
standards for their industries to regain small business status. It will 
also help currently small businesses to retain their small business 
status for a longer period. Many firms may have lost their eligibility 
and find it difficult to compete at current size standards with 
companies that are significantly larger than they are. SBA believes the 
competitive impact will be positive for existing small businesses and 
for those that exceed the size standards but are on the very low end of 
those that are not small. They might otherwise be called or referred to 
as mid-sized businesses, although SBA only defines what is small; 
entities that are not small are ``other than small.''

3. What are the projected reporting, recordkeeping and other compliance 
requirements of the rule?

    The inflation adjustment to size standards imposes no additional 
reporting or recordkeeping requirements on small businesses. However, 
qualifying for Federal procurement and a number of other programs 
requires that businesses register in the SAM database and certify in 
SAM that they are small at least once annually. Therefore, newly 
eligible small businesses opting to participate in those programs must 
comply with SAM requirements. Businesses whose status changes in SAM 
from other than small to small must update their SAM profiles and 
complete the ``representations and certifications'' sections of SAM. 
However, there are no costs associated with SAM registration or 
certification. Changing size standards alters access to SBA's programs 
that assist small businesses, but does not impose a regulatory burden 
because they neither regulate nor control business behavior.

4. What are the relevant Federal rules, which may duplicate, overlap, 
or conflict with the rule?

    Under section 3(a)(2)(C) of the Small Business Act, 15 U.S.C. 
632(3)(a)(2)(C), Federal agencies must use SBA's size standards to 
define a small business, unless specifically authorized by statute to 
do otherwise. In 1995, SBA published in the Federal Register a list of 
statutory and regulatory size standards that

[[Page 3956]]

identified the application of SBA's size standards as well as other 
size standards used by Federal agencies (60 FR 57988 (November 24, 
1995)). SBA is not aware of any Federal rule that would duplicate or 
conflict with establishing size standards.
    However, the Small Business Act and SBA's regulations allow Federal 
agencies to develop different size standards if they believe that SBA's 
size standards are not appropriate for their programs, with the 
approval of SBA's Administrator (13 CFR 121.903). The SBA's regulations 
(13 CFR 121.903(c)) authorize an agency to establish an alternative 
small business definition for the sole purpose of performing a 
regulatory flexibility analysis pursuant to the Regulatory Flexibility 
Act (5 U.S.C. 601(3)), after consultation with the Office of Advocacy 
of the U.S. Small Business Administration.

5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?

    By law, SBA is required to develop numerical size standards for 
establishing eligibility for Federal small business assistance 
programs. Other than varying size standards by industry and changing 
the size measures, no practical alternative exists to the systems of 
numerical size standards.
    SBA's only other consideration was whether to adopt the size 
standards presented in the interim final rule with no further increase 
for the inflation. However, SBA believes that the inflation that has 
occurred since the publication of the June 12, 2014 interim final rule 
is not sufficient to warrant an additional increase at this time.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
For the reasons set forth in the preamble, the interim rule amending 13 
CFR part 121, which was published at 79 FR 33647 on June 12, 2014, is 
adopted as a final rule without change.

    Dated: January 12, 2016.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-01410 Filed 1-22-16; 8:45 am]
 BILLING CODE 8025-01-P