Small Business Size Standards: Revised Size Standards Methodology, 18468-18483 [2018-08418]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 83, Number 82 (Friday, April 27, 2018)]
[Proposed Rules]
[Pages 18468-18483]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08418]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121


Small Business Size Standards: Revised Size Standards Methodology

AGENCY: U.S. Small Business Administration.

ACTION: Notification of availability of white paper; comment request.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) advises 
the public that it has revised its white paper explaining how it 
establishes, reviews and modifies small business size standards. The 
revised white paper, entitled ``SBA's Size Standards Methodology 
(April, 2018),'' (Revised Methodology) is available for review and 
comments. This notification discusses the comments SBA received on the 
methodology that was applied to the recent review of size standards 
under the Jobs Act and Agency's responses, followed by a description of 
major changes to the methodology and their impacts on size standards.

DATES: SBA must receive comments to this revised methodology on or 
before June 26, 2018.

ADDRESSES: The revised ``Size Standards Methodology (2017)'' (Revised 
Methodology) White Paper is available on the SBA's website at https://www.sba.gov/size-standards-methodology and on the Federal rulemaking 
portal at https://www.regulations.gov. Comments may be submitted on the 
Revised Methodology, identified by Docket number SBA-2018-0004, by one 
of the following methods: (1) Federal eRulemaking Portal: https://www.regulations.gov. Follow the instructions for submitting comments, 
(2) Mail/Hand Delivery/Courier: U.S. Small Business Administration, 
Khem R. Sharma, Chief, Office of Size Standards, 409 Third Street SW, 
Mail Code 6530, Washington, DC 20416, or (3) Email at 
[email protected].
    SBA will post all comments on https://www.regulations.gov. If you 
wish to submit confidential business information (CBI) as defined in 
the User Notice at https://www.regulations.gov, please submit the 
information to Khem R. Sharma, Chief, Office of Size Standards, 409 
Third Street SW, Mail Code 6530, Washington, DC 20416, or send an email 
to [email protected]. Highlight the information that you consider 
to be CBI and explain why you believe SBA should hold this information 
as confidential. SBA will review the information and make the final 
determination of whether it will publish the information or not.

FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Chief, Office of Size 
Standards, (202) 205-7189 or [email protected].

SUPPLEMENTARY INFORMATION: The revised white paper, entitled ``SBA's 
Size Standards Methodology'' describes the SBA's methodology for 
establishing, reviewing and adjusting its small business size standards 
pursuant to the Small Business Act (Act) and related legislative 
guidelines. Under the Act (Pub. L. 85-536, as amended), the SBA's 
Administrator has authority to establish small business size standards 
for Federal government programs. The white paper provides a detailed 
description of the size standards methodology. SBA welcomes comments 
and feedback on the Revised Methodology, which SBA intends to apply to 
the forthcoming five-year comprehensive review of size standards 
required by section 1344(a)(2) of the Small Business Jobs Act of 2010 
(Jobs Act), Public Law 111-240, Sep. 27, 2010.
    To determine eligibility for Federal small business assistance 
programs, SBA establishes small business definitions (commonly referred 
to as size standards) for private sector industries in the United 
States. SBA's existing size standards use two primary measures of 
business size: Average annual receipts and number of employees. 
Financial assets and refining capacity are used as size measures for a 
few specialized industries. In addition, the SBA's Small Business 
Investment Company (SBIC), 7(a), Certified Development Company (CDC/
504) Programs determine small business eligibility using either the 
industry based size standards or net worth and net income based 
alternative size standards. Presently, there are 28 different industry 
based size standards, covering 1,031 North American Industry 
Classification System (NAICS) industries and 14 ``exceptions.'' Of 
these, 531 are based on average annual receipts, 509 on number of 
employees (one of which also includes barrels per day total refining 
capacity), and five on average assets.
    In 2007, SBA initiated a comprehensive review of size standards. 
Subsequently, Congress passed the Small Business Jobs Act in 2010 (Jobs 
Act) (Pub. L. 111-240, 124 Stat. 2504, Sept. 27, 2010) requiring SBA to 
review, every five years, all size standards and make necessary 
adjustments to reflect market conditions. SBA recently completed the 
first five-year review of size standards under the Jobs Act and will 
start the next five-year review in the near future. Usually, once every 
five years, SBA adjusts all monetary based size standards for 
inflation. The SBA's latest inflation adjustment to size standards 
became effective on July 14, 2014 (79 FR 33647 (June 12, 2014)). SBA 
also updates its size standards, also every five years, to adopt the 
Office of Management and Budget's (OMB's) quinquennial NAICS revisions 
to its table of small business size standards. SBA adopted the OMB's 
2017 NAICS revisions for its size standards, effective October 1, 2017 
(82 FR 44886 (September 27, 2017)).
    As part of the comprehensive size standards review initiated in 
2007, SBA established a detailed methodology explaining how SBA 
establishes, reviews and adjusts size standards based on industry and 
Federal contracting factors. In 2009, SBA published a document in the 
Federal Register notifying the public that SBA's ``Size Standards 
Methodology'' White Paper (Methodology) is available on the SBA's 
website at www.sba.gov/size for review and comments (74 FR 53940 
(October 21, 2009)). Specifically, in the notification and in all 
subsequent proposed rules revising size standards for various NAICS 
Sectors, SBA sought comments on a number of issues concerning its 
Methodology, such as whether there are alternative methodologies that 
SBA should consider; whether there are alternative or additional 
factors or data sources that SBA should evaluate; whether SBA's 
approach to establishing small business size standards makes sense in 
the current economic environment; whether SBA's applications of anchor 
size standards are appropriate in the current economy; whether there 
are gaps in SBA's Methodology because of the lack of comprehensive 
data; and whether there are other facts or issues that SBA should 
consider. The comment period for the Methodology was open from October 
21, 2009 to September 30, 2015.
    SBA also sought comments on a number of policy questions that the 
Agency has to consider when developing a methodology for establishing, 
evaluating and revising its small business size standards, such as how 
high a small business size standard should be, should there be a single 
measure of business size for all

[[Page 18469]]

industries (i.e., employees or annual receipts), should there be a 
fixed number of ``bands'' of size standards or a separate size standard 
for each industry, and should employee based size standards be adjusted 
to account for labor productivity growth and technology similar to the 
adjustment of monetary based size standards for inflation.
    SBA received 17 comments specifically on its Methodology and many 
comments addressing the different aspects of the Methodology as applied 
to various proposed rules on both receipts-based and employee-based 
size standards. These comments and SBA's responses are discussed below.

Comments on Primary Factors

    1. Average size: One commenter noted that the accuracy of the 
weighted average would increase if the size groupings for higher 
employment and receipts levels were more refined. A few commenters 
suggested using the median firm size, rather than average firm size.
    SBA's response: SBA agrees, but increasing the number of size 
groupings for higher employment and receipts levels will increase the 
amounts of data that will be suppressed for the disclosure restriction. 
As the number of firms declines with receipts or employment levels in 
every industry, more granular size groupings would result in only a 
very few firms in higher size groupings, thereby causing employment and 
receipts levels to be suppressed to ensure confidentiality. A sizeable 
number of cells are already suppressed in the existing size groupings, 
especially at the 6-digit NAICS industry levels that SBA uses as the 
bases for size standards. When industry data on firm sizes are found or 
likely to be very skewed, SBA will consider using the median firm size, 
instead of the average.
    2. Start-up costs and entry barriers: One commenter argued that 
average assets is not a good measure of start-up costs and entry 
barriers, such as product differentiation, brand reputations, patents, 
intellectual property, economies of scale, and the need for specialized 
capital goods, especially in services industries. Data on asset size 
are not publicly available for many private companies and, where they 
are available, the data will not provide useful quantitative 
information on the magnitude of start-up costs and entry barriers 
across industries, the commenter added. For these reasons, the 
commenter recommended that SBA should consider dropping average assets 
as a proxy for start-up costs and entry barriers as one of the primary 
factors in size standards analysis.
    Another commenter argued that while using average assets may be a 
useful method for assessing barriers to entry into the commercial 
market, it fails to capture the extensive administrative and compliance 
requirements associated with Federal contracts, the different skills 
required for Federal contracts as compared to the commercial market, 
and the size of contracts, all of which also act as significant entry 
barriers to the Federal market. The commenter recommended that SBA also 
evaluate the unique costs of entering the Federal marketplace.
    SBA's response: Given the lack of actual data on various measures 
of start-up costs and entry barriers, including product 
differentiation, economies of scale, etc., SBA believes that average 
assets size does serve as a reasonable proxy for start-up costs and 
entry barriers. Industries with high average assets are likely to have 
higher capital requirements and greater barriers for new firms to enter 
the market, thereby supporting higher size standards, all else being 
equal. The evaluation of more, not fewer, factors will result in more 
robust and analytically sound size standards.
    SBA agrees that these are several important factors determining 
businesses' ability to enter the Federal market and they should be 
considered when evaluating size standards. However, there exists no 
readily available data in a form to be able to formalize these factors 
in the size standards methodology. Given the lack of data, SBA believes 
that evaluation of small business Federal market share relative to 
small business share of the industry total revenues would provide a 
fairly good indication of how successful small businesses are in 
participating in the Federal market. In addition, SBA also looks at the 
distribution of Federal contracts by firm size and size of contracts, 
when appropriate.
    3. Industry competition: One commenter noted that evidence does not 
support using a 40 percent cut off of the four-firm concentration ratio 
(CR4) as a dividing line between competitive industries and 
oligopolistic industries or ones that are characterized by market 
dominance from a few firms. The commenter suggested that SBA should 
consider all CR4 values, not just those above the 40 percent threshold, 
as a measure of industry competition in establishing size standards. It 
would be methodologically more sound to use the CR4 statistic directly 
in the size standard interpolations to avoid double counting the 
receipts of the four largest firms, the commenter added.
    Another, an industry association representing engineering firms, 
recommended that SBA consider using the ``8-firm concentration ratio,'' 
which it claimed is also a widely accepted tool for measuring market 
share (although no references were provided to support this claim) for 
evaluating industry competition. The commenter stated that the 8-firm 
concentration ratio provides a more accurate picture of market share 
controlled by the largest firms in an industry. According to the 
association, using the 8-firm concentration ratio, SBA may find that 
the largest firms control more than 40 percent in more industries than 
using the 4-firm concentration ratio and SBA may have to increase size 
standards for those industries.
    SBA's response: SBA is aware of various measures (e.g., 4-firm 
ratio, 8-firm ratio, Herfindahl-Hirschman index, etc.) that are used to 
measure industry competition and dominance. Because the 4-firm 
concentration ratio is simple for the public to understand and has long 
been used and accepted as an industry factor in size standards 
analysis, SBA continued using it until the recently completed 
comprehensive size standards review. This is also the most widely used 
measure in the relevant literature, as described in its Methodology. 
For these reasons, in the past SBA used the 40 percent 4-firm 
concentration ratio as the dividing line between the competitive 
industries and concentrated industries. Further, the special tabulation 
of the 2002 Economic Census that SBA used for developing the 
Methodology and the 2007 Economic Census tabulation SBA used in the 
recently completed comprehensive size standards review only included 
data to compute the 4-firm concentration ratio, not the 8-firm 
concentration ratio. However, using the 2012 Economic Census 
Tabulation, SBA has evaluated the appropriateness of using the 8-firm 
concentration ratio in the Revised Methodology to be used in the 
forthcoming review of size standards.
    In response to the comment as well as based on its own evaluation 
of the current methodology, in the Revised Methodology, SBA is 
proposing to use all values of the 4-firm concentration ratios directly 
in the analysis, as opposed to using only 40 percent and above. 
Accordingly, as explained in the Revised Methodology, the industries 
with lower 4-firm concentration ratios will be assigned lower size 
standards and those with higher 4-firm concentration ratios higher size

[[Page 18470]]

standards, all else remaining the same. SBA also repeated the same 
analysis using the 8-firm concentration ratio. Because the results 
based on the 4-firm concentration ratio were found to be quite 
comparable to the results based on the 8-firm concentration ratio, SBA 
has decided to continue using the 4-firm concentration ratio as the 
measure of industry competition.
    4. Federal contracting factor: While commenters generally supported 
SBA's approach to assigning higher size standards for industries where 
small businesses are underrepresented in the Federal market relative to 
their share in the industry's total receipts, they offered suggestions 
for improvement. For example, one commenter expressed concern with 
reconciling SBA's approach to assigning a size standard based on 
Federal contracting factor and imposing a cap for the maximum size 
standard when the current size standard is at or near the maximum 
level. If SBA established a fixed increment in size standards levels 
with no maximum cap, it would provide the flexibility to increase size 
standards, when necessary, based on the Federal contracting factor, the 
commenter noted. Another commenter stressed the need to consider 
barriers to enter to Federal market as a factor in size standards 
analysis. A few commenters to the proposed rules for various NAICS 
sectors recommended giving the Federal contracting factor a greater 
weight to reflect administrative and compliance requirements and 
different skills required for Federal contracts, and size of contracts.
    One commenter recommended that SBA should assess the extent to 
which contracts are being set aside within specific industries. The 
commenter argued that a higher size standard may not necessarily lead 
to a higher small business share in Federal market in an industry if 
small business set-asides are not used in that particular industry. 
SBA's goal should be to spread all small business contracting 
opportunities across all industries, because raising size standards may 
not have any impact if Federal agencies are over-relying on set-aside 
contracts only in a handful of industries to meet their small business 
contracting goals.
    One commenter on construction size standards suggested that SBA 
should consider median size of Federal contracts when establishing size 
standards. The current method does not consider the Federal contracting 
trends in particular markets, the commenter noted. Either the bundling 
or contract consolidation should be curtailed or size standards 
increased, the commenter added.
    SBA's response: In the Revised Methodology, SBA is not applying a 
fixed number of size standards levels or ``bands'' and is letting the 
data determine an appropriate size standard for each NAICS industry, 
with appropriate rounding as explained elsewhere in this document and 
the Revised Methodology. However, SBA will continue its policy of 
capping the maximum size standard at a certain level. As noted earlier, 
allowing the data to determine a size standard without a cap would 
result in very high size standards for some industries, enabling very 
large businesses, possibly with billions in revenue or tens of 
thousands of employees, to qualify as small at the expense of genuine 
small businesses that need Federal help the most.
    Federal contracting is one of the factors SBA evaluates, along with 
industry data and other relevant considerations, when reviewing a size 
standard. The SBA's Methodology permits, if necessary, a higher weight 
to the Federal contracting factor. However, SBA is concerned that 
giving an excessive weight to Federal procurement may produce skewed 
results with unintended adverse impact on small businesses. For 
procurement sensitive industries, SBA might consider giving a greater 
weight to the Federal contracting factor, and possibly evaluating 
additional data related to Federal contracts, where appropriate. For 
the recently completed comprehensive size standards review, SBA 
considered the Federal procurement factor for those industries that 
received $100 million or more in total Federal contracts annually and 
showed a large disparity between small business shares in the Federal 
market and the industry's total sales.
    While SBA agrees that small business opportunities should spread 
across all industries, it does not believe that size standards are the 
only factor driving Federal agencies' small business set-aside 
decisions in the various industries. SBA's size standards establish 
eligibility for the small business set-aside opportunities that Federal 
agencies provide in a particular industry, but they do not dictate how 
the agencies make their set-aside decisions. The number of set-asides 
in each industry can be a function of many factors, including the 
nature, scope, types, volume, and costs of goods and services the 
agencies need to procure. It should also be noted that the current 23 
percent small business contracting goal only applies to total 
procurements government-wide, not to individual industries.
    As mentioned earlier, there is a lack of data on administrative and 
compliance requirements and different skills required to participate in 
government contracting for SBA to be able to formalize these factors 
and assign a specific weight for the Federal contracting factor for 
specific industries. Implicitly, in the recently completed 
comprehensive size standards review, SBA gave more weight to the 
Federal contracting factor in some industries than in others by 
assigning higher size standards for those industries that had $100 
million or more in annual Federal contracting and a lower small 
business share in the Federal market relative to their share in 
industry's total sales. In the Revised Methodology, SBA is reducing 
that threshold to $20 million, thereby resulting in more industries 
being evaluated for Federal market conditions.
    SBA does not agree that it does not consider Federal contracting 
trends when establishing size standards. SBA compares the small 
business share of Federal contracts with the small business share of 
total receipts for each industry. Specifically, if the small business 
share of contract dollars is substantially lower than the small 
business share of total receipts, SBA proposes a size standard that is 
higher than the current standard.

Comments on Measures of Business Size

    One commenter to the SBA's Methodology recommended that SBA use the 
measure of firm size that best represents the magnitude of a business 
operation within an industry and that indicates the level of the 
business activity generated by firms. Accordingly, the commenter argued 
that subcontracting should support the number of employees as a measure 
of business size for size standards, not average annual receipts as SBA 
proposed. The commenter contended that when there is subcontracting, 
receipts leads to double counting and does not provide a good measure 
of the level of real economic activity. SBA's justification of using 
receipts when there is subcontracting conflicts with its justification 
to use employees when there exists variation in the degree of vertical 
integration, the commenter added.
    Several commenters to the proposed rule for NAICS Sector 54 (76 FR 
14323 (March 16, 2011)) argued that number of employees is a better 
measure of business size, especially for architectural and engineering 
industries

[[Page 18471]]

where ``pass throughs'' are high and receipts are much more sensitive 
to business cycles, costs of materials, and inflation in the economy. 
One commenter to the Sector 48-49 proposed rule (76 FR 27935 (May 13, 
2011)) suggested that SBA take into account the costs of materials and 
labor and establish size standards in terms of gross profits, instead 
of total receipts. One commenter to the Sector 23 proposed rule (77 FR 
42197 (July 18, 2012)) argued that small business size standards for 
construction industries should be based on number of full time 
equivalent (FTE) employees, rather than on average annual receipts. 
Receipts are a ``misleading indicator'' for size of construction 
companies due to sharp increases in material costs, the commenter 
noted. In addition, the commenter maintained that a construction 
company's gross receipts are inflated relative to the size standard as 
subcontracting and material costs that could account for as much as 85 
percent of work being performed.
    One commenter to the Sector 31-33 proposed rule (79 FR 54146 
(September 10, 2014)) suggested to include, in addition to employee 
counts, other criteria for establishing size standards for 
manufacturing industries, such as business tenure (5 years), 
subcontracting limitations, revenue limits ($30 million), and net worth 
limits ($5 million).

SBA's Response

    First, Congress directs SBA to establish size standards for 
manufacturing concerns using number of employees and service concerns 
using average annual receipts. 15 U.S.C. 632(a)(2)(C). Further, for 
industries where subcontracting or ``pass throughs'' are common, an 
employee based size standard may encourage businesses to excessively 
outsource Federal work to other businesses in order to remain within 
the size standard. Under the receipts based standard, businesses are 
not allowed to deduct the value of any work outsourced.
    SBA also does not accept the suggestion to establish size standards 
in terms of gross profits. For a vast majority of industries, SBA uses 
either average annual receipts or number of employees as a measure of 
business size for size standards purposes. If a size standard were 
established in terms of gross profits, a company with hundreds of 
millions of revenues and thousands of employees can qualify as small 
under a profits-based size standard. It is not unusual for very lager 
companies to have little or negative profit over the course of business 
cycles. Such a firm would clearly be ``dominant'' in the industry and 
thus not a small business under the statutory requirement that a small 
business is one that is independently owned and operated and not 
dominant in its field of operation. Moreover, a firm's profits can be 
manipulated and thus would be an inconsistent and misleading measure of 
firm's size for size standards purposes.
    SBA disagrees that receipts based standards do not properly reflect 
the size of companies in the construction industry. Receipts, as a 
representative of the overall value of a company's entire portfolio of 
work completed in a given period of time, are a better measure of the 
size of a construction company to determine its eligibility for Federal 
assistance. Annual receipts measure the total value of a company's 
completed work. Under SBA's prime contractor performance requirements 
(see 13 CFR 125.6, limitations on subcontracting), a general 
construction company needs to perform as little as 15 percent of the 
value of work and a specialty trade contractor can perform as little as 
25 percent of the work with their own resources. SBA is concerned that 
employee based size standards could encourage construction companies 
near the size standard to subcontract more work to others to bypass the 
limitations on subcontracting and remain technically a small business. 
Regardless of the amount of work a company subcontracts to others, it 
is still part of its annual revenue, because the company is responsible 
for the entire contract. In other words, under a receipts based size 
standard, the company cannot deduct subcontracting costs from the 
average annual receipts calculation. Under the employee based size 
standard, companies would not count their subcontractors' employees to 
calculate their total number of employees. A company that subcontracts 
a lot of its work to others will have a considerably fewer employees 
than one that performs most of its work in-house.
    Regarding the comment that receipts are not an appropriate measure 
of size for construction businesses because they are too sensitive to 
increases in material costs and fluctuations in market conditions, SBA 
adjusts all monetary based size standards at least every five years and 
more frequently if necessary. Similarly, to minimize the impacts of 
fluctuations in market conditions, SBA calculates the receipts for size 
standards purposes as the average annual receipts over the preceding 
three completed fiscal years.
    In 2004, SBA proposed to replace average annual receipts with 
number of employees as the measure of size standards for most 
industries, including construction (see 69 FR 13129 (March 19, 2004)). 
Commenters in the construction industry generally opposed SBA's 
proposal for a number of reasons, such as those SBA states above. In 
addition, because employee based size standards are based on the 
average number of employees per pay period for the preceding 12 
calendar months, businesses would have to recalculate their size every 
month. Receipts, on the other hand, are calculated as the annual 
average over last three fiscal years and need to be updated only 
annually. This allows for fluctuations in market conditions. Employment 
data from the U.S. Census Bureau (Economic Census and County Business 
Patterns) and from other Federal statistical agencies (such as Bureaus 
of Economic Analysis and Labor Statistics) that SBA uses in its size 
standards analysis are based on total head counts of part-time, 
temporary and full-time employees, not based on FTEs. In other words, 
part-time employees are counted the same as full-time employees. In 
addition, using FTEs as a measure of size may increase reporting and 
record keeping requirements for small businesses to qualify for Federal 
programs. Thus, SBA is not adopting FTEs as a measure of size 
standards.
    Incorporation of net worth into SBA's table of size standards is 
not practicable. It is not a value that lends itself to comparing 
businesses in a particular industry. A company's net worth can be 
affected by a number of things, such as debt, repurchased corporate 
stock, etc. Furthermore, data on net worth is not available by 
industry. Other criteria proposed by the commenter would, SBA believes, 
be too nebulous, temporary, and subjective and therefore not useful 
when establishing size standards that usually must remain static and in 
place for a number of years. Establishing small business eligibility 
based on the combination of multiple criteria (such as revenue limit, 
net worth limit, and employee count), as suggested by the commenter, 
would create unnecessary complexity to and confusion with size 
standards.

Comments on Data Sources and Issues

    SBA received a number of comments on various data sources it uses 
to evaluate industry and Federal procurement factors in developing or 
reviewing size standards, in particular the Economic Census and Federal 
Procurement Data System--Next Generation (FPDS-NG). Specifically,

[[Page 18472]]

commenters contended that the Economic Census data that SBA uses in 
size standards analysis did not adequately reflect the conditions in 
their industries and recommended using alternative data sources. 
However, with a few exceptions, commenters did not provide alternative 
data or sources. When alternative data or their sources were provided, 
such data was either not complete or not representative of the overall 
industry. A few commenters pointed out that the Economic Census data 
were outdated and did not reflect current industry structure. Some 
commented that the Economic Census includes revenues from non-Federal 
work, international work, and work in non-primary industry in revenues 
for primary industry, thereby distorting average firm size and 
estimated size standards.
    One commenter stated that the FPDS-NG data does not provide a 
complete picture of small business participation in the Federal 
marketplace. Specifically, the commenter pointed out that there exist 
no data on work that large prime contractors subcontracted to small 
businesses, on work subcontracted to large firms by small prime 
contractors, and on the size of firms performing Federal work within 
small and large business categories. Citing these problems, the 
commenter stated that there is no way of knowing exactly how successful 
and competitive small businesses are in the Federal market under the 
current size standards. Additionally, the commenter contented that due 
to the lack information on the exact sizes of businesses receiving 
Federal contracts, it is difficult to estimate the impact of size 
standards changes on small business participation in Federal market.

SBA's Response

    The Economic Census is the most comprehensive data source available 
to evaluate industry characteristics. The Economic Census data provides 
a complete and actual representation of an industry structure, because, 
by law, all firms are required to respond to the Economic Census. For 
these reasons, SBA will continue to use the Economic Census as the 
principal source of industry data for its size standards analyses and 
reviews. However, the Agency will give due considerations to 
alternative data provided by the industry participants, especially if 
such data is representative of the entire industry in question.
    The Economic Census tabulations that SBA receives from the U.S. 
Census Bureau are based on primary industry at the establishment level. 
Establishments doing some work in an industry may not be included in 
that industry if that is not their primary work. SBA is aware of this 
and other problems with the Economic Census data. For industries where 
such problems are significant, SBA also evaluates the System for Award 
Management (SAM) and FPDS-NG data to evaluate industry characteristics. 
While SBA is attentive to a substantial lag that exists between the 
times when Economic Census data is collected and when the data becomes 
available, the Economic Census is still the latest and most 
comprehensive data source available out there for evaluating all 
industries in a consistent manner.
    SBA does not agree that industry's revenues reported in the 
Economic Census are distorted for size standards analysis because they 
include non-federal, non-primary and overseas activities. First, 
revenues that U.S. companies generate in foreign countries are not, by 
design, included in the Economic Census. Second, including revenues 
from non-federal or non-primary activities in an industry's revenues is 
consistent with how SBA calculates revenues for size standards 
purposes. In other words, when calculating a company's total revenues 
for size standards purposes, revenues that the company has received 
from all sources (including Federal, state, and private work, and work 
related to non-primary industries) must be counted. See 13 CFR 121.104.
    SBA is aware that the FPDS-NG data does not contain information on 
subcontracting. The Electronic Subcontracting Reporting System (eSRS) 
collects data on subcontracting activity, but those data are not 
available by NAICS industry. However, despite these and other issues as 
discussed in the Revised Methodology, SBA believes that FPDS-NG is 
still the best data source available for assessing the small business 
participation in the Federal marketplace. Prior to 2013 when FPDS-NG 
data did not include exact size of the companies receiving contracts, 
SBA obtained size of contract recipients by merging the FPDS-NG data 
with employees and revenues information from SAM, formerly Central 
Contractor Registration (CCR). By using this analysis in conjunction 
with the share of small businesses in the Federal market relative to 
their share in overall industry total sales, SBA assessed the impacts 
of proposed size standards changes on small business participation in 
the Federal market. Now, SBA estimates the impacts of size standards 
changes by using small business goaling data, which includes the actual 
size of contract recipients.

Comments on Small Business Size Definitions and Related Issues

    A number of commenters to the proposed rules for various NAICS 
sectors asserted that SBA's small business size standards did not 
represent ``truly small'' businesses. Many stated that SBA's size 
standards included up to 99 percent of all businesses as small. One 
commenter added that SBA's small business definitions are much larger 
than those used by other countries (such as Australia and European 
Union) and by the U.S Congress, for example, for the Affordable Health 
Care Act.

SBA's Response

    SBA acknowledges that in some industries its size standards could 
include up to 97-99 percent of all firms as small. However, while that 
might appear to be a large segment of an industry in terms of the 
percentage of firms, for a majority of industries small businesses only 
account for less than 50 percent of total industry receipts and less 
than 25 percent of total Federal contract dollars. It is not uncommon 
for a small number of large firms to have a high percentage of industry 
receipts and employees and to obtain the bulk of Federal contacts. 
These are important considerations when establishing or reviewing small 
business size standards. Additionally, while SBA's size standards 
include more than 90 percent of firms for most industries, the Agency 
ensures that no business concern that qualifies as ``small'' is 
dominant in its industry.
    Common dictionary definitions of what is ``small'' are not relevant 
to why and how SBA establishes small business size standards. SBA's 
definition of a small business concern is more than a general meaning 
of the word ``small'' in a dictionary. In addition, numeric small 
business size standards are just one component of what constitutes a 
small business concern under SBA's regulations. SBA's size standards 
set thresholds on how large a business concern can be and still qualify 
as small for various Federal government programs. If a firm (together 
with its affiliates) meets both SBA's definition of a business concern 
(see 13 CFR 121.105) and its numeric size thresholds (Sec.  121.201), 
it is a small business concern; if it does not meet both SBA's 
definition of a business concern and its numeric size thresholds, it is 
considered ``other than small.'' The ``dictionary'' definitions of 
``small'' usually speak in very general terms. However, under SBA's 
size standards, a company that qualifies as ``small'' in one industry 
may

[[Page 18473]]

not qualify as ``small'' in another industry, because being small is 
relative to other business concerns in the same field of operation.
    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. Likewise, SBA's small business size 
standards are not relevant to programs of other countries. 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.

Comments on Mid-Sized Business Concerns

    Several comments to the proposed rule for NAICS Sector 54 
recommended a number of alternatives to enable currently large but 
formerly small firms (which they called as ``mid-sized'' businesses) to 
obtain Federal contracts. Those alternatives and SBA's responses are 
discussed below.
    Define as small businesses all those which are not dominant in 
their field of operation, in accordance with the section 3(a)(1) of the 
Small Business Act. For example, consider the average size of the 
largest or dominant businesses in an industry and determine the size 
standard as a percentage of that average.
    SBA's response: SBA does not adopt this recommendation. As 
described in its Methodology and all proposed rules, in establishing or 
modifying size standards, SBA considers various industry factors (e.g., 
average size, industry concentration, and distribution of firms by 
size) to identify the small business segment of an industry. The Small 
Business Act (Act) provides that a business concern defined as small 
cannot be dominant in its field of operation. SBA has implemented this 
provision of the Act by ensuring that a size standard based on its 
industry analysis does not include a business concern that is dominant 
in its industry. For this, SBA generally evaluates the market share of 
a firm that qualifies as small under a proposed or revised size 
standard and distribution of firms by size. If the results show the 
largest or potentially dominant firms qualifying as small under the 
proposed or revised size standard, SBA lowers the size standard. The 
legislative history of the Act does not imply that a firm that is not 
dominant in its field can automatically be defined as small. Size 
standards based on the average size of the largest or dominant 
businesses in an industry could result in a size standard that will 
enable extremely large businesses to qualify as small, thereby hurting 
truly small businesses that need the Federal assistance the most.

    Develop multi-tiered employee size standards based on the size 
of a Federal contract, such as a size standard of 50 employees for 
contracts valued at less than $5 million, of 51-150 employees for 
contracts valued at $5 million to $50 million, . . . , , and of 
1,001-2,000 employees for contracts valued at $500 million or more.

    SBA's response: While this approach may offer Federal contracting 
opportunities for various small and mid-sized businesses, SBA does not 
adopt this recommendation for several reasons. First, SBA believes that 
such tiered size standards within each industry would add significant 
complexity to size standards, which many believe are already too 
complex. Second, in order for the tiered size standards approach to 
work, Congress would need to establish new small business procurement 
goals for each tier to ensure that small businesses at different tiers 
have a fair access to Federal contracts. Third, this would warrant much 
more burdensome system and reporting and requirements (e.g., SAM and 
FPDS-NG) than those that currently exist and the small business Federal 
procurement programs would become significantly more complex to 
administer. Fourth, the Small Business Act authorizes SBA to establish 
one definition of what is a small business concern, not tiered 
definitions of what is ``small,'' ``medium,'' and so forth. Fifth, past 
programs that applied the tiered small business approaches, such as the 
Very Small Business Program and the Emerging Small Business category 
under the CompDemo Program were not successful and were eventually 
repealed by Congress.

    Establish separate size standards for Federal contracting. 
Commenters stated that Federal contracting imposes restrictions on 
business practices and operations not included in the commercial 
market. They argued that given the differences between commercial 
and government work, a separate set of size standards are warranted 
for Federal procurement.

    SBA's response: SBA does not adopt this recommendation. Federal 
procurement is already one of the primary factors SBA considers when 
developing or reviewing size standards. However, giving an excessive 
weight to Federal procurement may produce size standards that are 
likely to be biased in favor of more successful Federal contractors, 
which in turn would reduce contracting opportunities for smaller and 
emerging businesses. For procurement sensitive industries, however, SBA 
may consider giving a greater weight to the Federal contracting factor 
and possibly evaluating additional data related to Federal contracts. 
Additionally, in a number of industries, SBA has established separate 
size standards for Federal contracts of very specific types of goods 
and services, which are usually known as ``exceptions'' in the SBA's 
table of size standards.
    SBA is also concerned that if separate size standards for Federal 
procurement are appreciably higher than the current size standards, 
that may cause significant disadvantage to very small businesses when 
they compete for Federal small business set-aside contracts.

    Calculate average annual receipts based on five years. The 
commenter also recommended calculating average annual receipts over 
the preceding five years, instead of three. The commenter alleged 
that this would allow small businesses to plan and increase capacity 
before entering full and open competition and provide longer 
transition time from small business status to other than small 
business status. In addition, small businesses with large temporary 
increases in revenues for one or two years would not lose their 
small business status.

    SBA's response: SBA does not adopt this comment. SBA believes that 
calculating average annual receipts over three years ameliorates 
fluctuations in receipts due to variations in economic conditions. SBA 
maintains that three years should reasonably balance the problems of 
fluctuating receipts with the overall capabilities of firms that are 
about to exceed the size standard.

[[Page 18474]]

Extending the averaging period to five years would allow a business to 
greatly exceed the size standard for some years and still be eligible 
for Federal assistance, perhaps at the expense of other smaller 
businesses. Such a change is more likely to benefit successful small 
business graduates by allowing them to prolong their small business 
status, thereby reducing opportunities for currently defined small 
businesses.

Comments on Tiered Size Standards

    Several comments to the Sector 54 proposed rule recommended that 
SBA establish some form of tiered size standards for Federal 
contracting, including a ``micro-business'' category to help truly 
small businesses that are way below the current size standards. 
Similarly, one commenter on the Sector 48-49 proposed rule stated that 
more than two-thirds of companies registered in SAM have fewer than 20 
employees and argued that those are the companies that need Federal 
support the most. The commenter suggested that, for goods producing 
industries, businesses with fewer than 20 employees should be 
classified as ``small business'' and contracts valued at $150,000 or 
less should be set-aside only for those businesses. Similarly, 
according to the commenter, businesses with 20-40 employees should be 
classified as ``medium sized small business'' and contracts between 
$150,000 and $500,000 should be reserved for those businesses. For 
services industries, less than $100,000 in sales should be labeled as 
``small business,'' $300,000 as ``medium sized small business'' and 
$500,000 or more as ``large small business,'' the commenter suggested. 
A commenter to the proposed rule for Sector 44-45 also suggested that 
SBA designate a separate sub-group of truly small businesses and give 
them special preference when competing for smaller government 
contracts.

SBA's Response

    SBA does not adopt the commenters' suggestions to establish 
``micro-business'' or ``tiered'' size standards for several reasons. 
First, SBA is concerned that very small or ``micro'' size standards, 
such as those suggested by the commenters, may not adequately capture 
the small business segment in an industry that small business programs 
are intended to help. The size standards should be such that small 
businesses are able to grow and develop to an economically viable size 
while remaining eligible for Federal assistance. If size standards were 
set too low, small businesses will quickly outgrow the size standards 
and be forced to compete with significantly larger businesses for 
Federal contracts under full and open competition. However, as stated 
elsewhere in this document, SBA is also equally concerned about setting 
size standards too high, as doing so could put smaller businesses at a 
disadvantage in competing for Federal opportunities. Second, such 
tiered size standards would add significant complexity to size 
standards, which many believe are already too complex. Third and most 
importantly, the Small Business Act requires SBA to establish one 
definition of what is a small business concern, not what is ``very 
small,'' ``small,'' ``medium-sized,'' and so forth. Also, as stated 
elsewhere, for tiered size standards to work and benefit small 
businesses, Congress needs to enact small business contracting goals 
for various tiers to ensure that small businesses at each tier have a 
fair share of Federal contracts.

Comments on Fixed Number of Size Standards

    Commenters generally supported SBA's Methodology and its proposal 
to use a fixed number of size levels to simplify size standards. There 
were a few who opposed fixed size levels and believed, because of wide 
gaps between the two successive size levels, calculated size standards 
could be larger or smaller than they should otherwise be.
    One commenter contended that the Methodology does not provide a 
convincing economic basis for restricting size standards to a small 
number of fixed levels or ``bands''. Similarly, it does not provide a 
reasoned, evidence-driven basis for instituting a 1,000-emplpyee cap 
that is substantially below the 1,500-employee size standard currently 
used for 17 industries, the commenter added. The commenter argued that 
the imposition of the 1,000-employee cap for employee based size 
standards appears arbitrary. The Methodology would be more transparent 
and better reflect the economic characteristics of the industry if SBA 
let the data and analytical results determine the maximum size standard 
for an industry, the commenter suggested. The maximum size standard 
should be a conclusion of the SBA's review and analysis of the data 
instead of being imposed as a constraint in the analysis and there is 
no reason to set an artificial cap on size standards, the commenter 
noted. Such a cap can only serve to restrict the SBA from providing 
support to small businesses that it intended to help.

SBA's Response

    The fixed size standard levels were developed to simplify size 
standards. There were 31 different levels of receipts based size 
standards at the start of the comprehensive size standards review, 
which SBA believed were both unnecessary and difficult to justify 
analytically with the available industry data. Thus, SBA adopted the 
fixed size standards approach and sought comments on whether more or 
fewer size standard levels are more appropriate.
    In response to these comments and the amendment to the Small 
Business Act (section 3(a)(8)) under the National Defense Authorization 
Act of Fiscal Year 2013 (NDAA 2013) (Pub. L. 112-239, Section 1661, 
Jan. 2, 2013) requiring SBA to not limit the number of size standards, 
SBA has relaxed the limitation on the number of small business size 
standards in the Revised Methodology. Specifically, SBA is proposing to 
assign a separate size standard to each NAICS industry, with a 
calculated receipts based size standard rounded to the nearest $500,000 
and a calculated employee based size standard rounded to the nearest 50 
employees for Manufacturing and industries in other sectors (except 
Wholesale and Retail Trade) and to the nearest 25 employees for 
Wholesale and Retail Trade. However, SBA has established the minimum 
and maximum size standard levels as its policy decisions such that 
businesses that qualify as small have adequate capabilities and 
resources to be able to perform government contracts and do not 
outcompete smaller businesses in accessing Federal assistance. Letting 
the data and analytical formulae alone determine the maximum size 
standard, as the commenter recommended, would result in a size standard 
for some industries that would enable quite large businesses, possibly 
with billions of revenues and thousands of employees, to qualify as 
small at the expense of smaller businesses that need Federal assistance 
the most.
    To be consistent with SBA's policy of not lowering any size 
standards in the recent comprehensive size standards, SBA retained the 
500-employee minimum and 1,500-employee maximum size standards for all 
industries in the Manufacturing Sector and for most industries with 
employee based size standards not in Sectors 31-33, 42, and 44-45, 
although in the Methodology SBA had proposed setting the minimum size 
standard for those industries at 250 employees and the maximum size 
standard at 1,000

[[Page 18475]]

employees. Further, lowering a manufacturing size standard below 500 
employees would conflict with the 500-employee size standard for non-
manufacturers under the SBA's nonmanufacturer's rule.

Comments on Anchor Size Standards

    Some commenters to the Sector 54 proposed rule questioned the 
rationale for using $7 million as an anchor for receipts based 
standards. Similarly, a few commenters to the proposed rules for 
employee based size standards questioned 500 employees as an anchor for 
employees based size standards. One commenter to the proposed rule on 
employee based size standards for industries not part of Sectors 31-33, 
42 and 44-45 argued that SBA's use of ``anchor size standard'' approach 
as a basis for evaluating characteristics of individual industries 
violated the statutory requirement on using common size standards.

SBA's Response

    SBA provided a detailed justification for using the ``anchor'' size 
standard approach in its Methodology. In fact, SBA has been using the 
``anchor'' approach since the 1980s when reviewing and modifying size 
standards without much concern from the public. The use of the 
``anchor'' served an important function by ensuring that the 
characteristics of all industries are consistently evaluated relative 
to the same baseline level. Additionally, when the Methodology was 
prepared, the $7 million anchor was the size standard for a majority of 
the industries that have receipts based size standards and 500-employee 
anchor applied to most industries that have employee based size 
standards. However, in response to the above comments and its own 
evaluation of the Methodology, in the Revised Methodology SBA is 
replacing the ``anchor'' approach with a ``percentile'' approach to 
evaluating characteristics individual industries, as explained 
elsewhere in this document.

Comments on Levels of Size Standards

    A few questioned the SBA's Methodology on the ground that 
calculated size standards are generally much higher than average firm 
size for the industry. Some expressed concerns regarding the use of 
simple average firm size, instead of median firm size, and averaging of 
size standards over different factors. One commenter stated that the 
SBA's Methodology of averaging size standards supported by different 
factors to calculate an overall size standard may result in loss of 
information and contended that the averaging procedure hurts companies 
in the $25.5 million to $35.5 million annual revenue range. The 
commenter believed that perhaps assigning different weights to 
different factors would provide better results, but did not offer any 
specific suggestions on those weights.

SBA's Response

    The purpose of evaluating various industry characteristics is to 
describe quantitatively the structure of an industry. Since no single 
characteristic or factor can adequately describe industry structure, 
SBA evaluates several factors (such as average firm size, industry 
concentration, and distribution of market shares by size) to best 
obtain a full representation of industry structure. In addition, in 
most cases, equating the size standard to the average or median firm 
size can result in an unacceptably low size standard that may not 
adequately capture the small business segment of the industry that 
small business programs are intended to assist. Thus, for most 
industries, size standards are generally higher than the simple average 
or median firm size so that small businesses have room to grow and 
develop to an economically viable size while still remaining eligible 
for Federal assistance. If size standards were too low, small 
businesses would quickly outgrow the size standards and be forced to 
compete with significantly larger businesses for Federal contracts on a 
full and open basis. SBA is also equally concerned about setting size 
standards too high, as doing so could put smaller businesses at a 
disadvantage in competing for Federal opportunities.
    SBA disagrees that calculating an industry's overall size standard 
as the average of size standards supported by each factor results in 
loss of information. In fact, this procedure preserves information 
provided by different factors, as opposed to basing the size standard 
only on one or two factors. Moreover, if the size standard was based on 
the largest value supported by any of the factors, it would put smaller 
companies at a competitive disadvantage. If warranted, SBA's 
Methodology allows assigning different weights to different factors.

Other Comments

    One commenter agreed with the Agency's position that lowering size 
standards under current economic conditions is not in the best 
interests of small business, but felt that increasing size standards by 
180-300 percent at one time was also not in the best interests of small 
business. He stated that size standards should be raised between 50-75 
percent and recommended a complete review of SBA's loan data, small 
business participation in Federal contracting, and other relevant 
factors within 2-3 years to determine if another increase is 
appropriate.
    One commenter to the proposed rule on Sector 44-45 (74 FR 53924 
(October 21, 2009)) suggested that there should be only one revenue 
based and only one employee based size standard, regardless of NAICS 
industry. Another commenter on the proposed rule on Sector 21 (77 FR 
72766 (December 6, 2012)) suggested that all size standards should be 
capped at $7 million in average annual receipts.
    Two commenters on the Sector 31-33 proposed rule supported SBA's 
proposed five employee based size standard levels for Manufacturing and 
successive differences of 250 employees rather than 500 employees. 
However, one suggested that SBA should establish an additional level of 
250 employees as the minimum size standard and set the maximum employee 
based standard at 1,000 employees. A lower size standard would protect 
emerging manufacturers that are not able to compete with established 
larger businesses, the commenter maintained. Both commenters argued 
that the Agency should lower size standards when the analysis supports 
lowering them. One argued that not lowering size standards would 
encourage manufacturers not to upgrade their facilities with advanced 
manufacturing techniques and allow larger manufacturers to compete with 
true small manufacturers. While one commenter suggested that SBA should 
not adjust employee based size standards for labor productivity growth 
and focus on protecting emerging businesses instead, the other pointed 
out that the lack of data on labor productivity would make adjusting 
size standards based on labor productivity difficult. One commenter 
supported weighing all factors equally, while the other suggested 
weighing some factors more than others for certain industries.
    Some commenters believed that SBA's Methodology was too complicated 
and difficult to understand.

SBA's Response

    SBA agrees that the proposed increases to size standards were quite 
significant for some industries and the Agency had sought comments if 
the increases to size standards should be limited to certain amounts. 
Comments generally supported the Methodology, industry and program data 
it evaluated and its proposed increases to size

[[Page 18476]]

standards. SBA believes that the changes in industry structure since 
the last comprehensive review of size standards nearly 30 years ago may 
have resulted in large increases to size standards for some industries. 
The Small Business Jobs Act of 2010 requires SBA to review all size 
standards at least once every five years and make adjustments to 
reflect market conditions. Prior to the next review, SBA will assess 
the impact of size standards revisions adopted in the current review.
    Using only one receipts based standard and only one employee 
standard would conflict with the statutory requirement that ``the [SBA] 
Administrator shall ensure that the size standard varies from industry 
to industry to the extent necessary to reflect the differing 
characteristics of the various industries and consider other factors 
deemed to be relevant by the Administrator.'' (15 U.S.C. 632(a)(3).) 
The relevant data show significant differences among industries and SBA 
believes that varying the size standard by industry not only complies 
with the Act, but it also serves the best interests of small businesses 
in that sector.
    Some of the issues the commenters raised regarding the minimum and 
maximum employee based size standards are addressed in the Revised 
Methodology. For example, SBA will continue to cap the maximum employee 
size standards for Manufacturing and industries in other sectors 
(except Wholesale and Retail Trade) at 1,500 employees, but will set 
the minimum employee size standard at 250 employees instead of 500. 
Additionally, the difference between the two successive employee size 
standards for those industries will be reduced to 50 employees. 
Employee size standards for Wholesale and Retail Trade will vary from 
50 employees to 250 employees with an interval of 25 employees. With 
respect to SBA's policy of not lowering size standards, SBA provided a 
detailed explanation in each rulemaking with respect to why lowering 
size standards was not in the best interest of small businesses during 
the times of weak economic conditions that prevailed when SBA was 
reviewing size standards Specifically, SBA was concerned that lowering 
size standards (including the minimum and maximum levels) would have 
caused numerous small businesses to lose their eligibility for Federal 
programs when they needed Federal assistance the most and run counter 
to various legislative and Administration's measures that were 
implemented to help small businesses and the economy.
    SBA's Methodology provides a vast array of information on its size 
standards analysis from a general description of the analytical 
approach to rigorous mathematical expressions of the calculation of 
industry factors. While some portions of the document are of somewhat 
technical nature, the public should be able to understand the general 
description of the various factors and data sources SBA uses when 
reviewing size standards.

Changes in the Revised Methodology

    The Revised Methodology, available for review and comment on the 
SBA's website at https://www.sba.gov/size-standards-methodology as well 
as at https://www.regulations.gov, describes in details how SBA 
establishes, evaluates and adjusts its small business size standards 
pursuant to the Small Business Act (Act) and related legislative 
guidelines. Specifically, the document provides a brief review of the 
legal authority and early legislative and regulatory history of small 
business size standards, followed by a detailed description of the size 
standards analysis.
    Section 3(a) of the Small Business Act; 15 U.S.C. 632(a) (Pub. L. 
85-536, 67 Stat. 232, as amended), provides the SBA's Administrator 
(Administrator) with authority to establish small business size 
standards for Federal government programs. The Administrator has 
discretion to determine precisely how the Administrator should 
establish small business size standards. The Act and its legislative 
history highlight three important considerations for establishing size 
standards. First, size standards should vary from industry to industry 
according to differences among industries. 15 U.S.C. 632(a)(3). Second, 
a firm that qualifies as small shall not be dominant in its field of 
operation. 15 U.S.C. 632(a)(1). Third, pursuant to 15 U.S.C. 631(a), 
the policies of the Agency should assist small businesses as a means of 
encouraging and strengthening their competitiveness in the economy. 
These three considerations continue to form the basis for the SBA's 
methodology for establishing, reviewing, or revising small business 
size standards.

Industry Analysis

    SBA examines the structural characteristics of an industry as a 
basis to assess industry differences and the overall degree of 
competitiveness of an industry and of firms within the industry. As 
described more fully in the Revised Methodology document, SBA generally 
evaluates industry structure by analyzing four primary factors--average 
firm size (both simple and weighted average), degree of competition 
within an industry (4-firm concentration ratio), start-up costs and 
entry barriers (average assets as a proxy), and distribution of firms 
by size (Gini coefficient). This approach to assessing industry 
characteristics that SBA has applied historically remains very much 
intact in the Revised Methodology. As the fifth primary factor, SBA 
assesses the ability of small businesses to compete for Federal 
contracting opportunities under the current size standards. For this, 
SBA examines the small business share of total Federal contract dollars 
relative to the small business share of total industry's receipts for 
each industry. SBA also considers other secondary factors as they 
relate to specific industries and interests of small businesses, 
including technological change, competition among industries, industry 
growth trends, and impacts of the size standards on SBA programs.
    While the factors SBA uses to examine industry structure remain 
intact, its approach to assessing the differences among industries and 
translating the results to specific size standards has changed in the 
Revised Methodology. Specifically, in response to the public comments 
against the ``anchor'' size standards approach applied in the latest 
review of size standards (discussed above), recent amendment to the Act 
limiting the use of common size standards (see section 3(a)(7)) of the 
Act) under the National Defense Authorization Act of Fiscal Year 2013 
(NDAA 2013) (Public Law 112-239, Section 1661, Jan. 2, 2013), and SBA's 
own review of the Methodology, in the Revised Methodology, SBA replaces 
the ``anchor'' approach with a ``percentile'' approach as an analytical 
framework for assessing industry differences and deriving a size 
standard supported by each factor for each industry.
    Under the ``anchor'' approach, SBA generally compared the 
characteristics of each industry with the average characteristics of a 
group of industries associated with the ``anchor'' size standard. For 
the recent review of size standards, the $7 million was the ``anchor'' 
for receipts based size standards and 500 employees was the ``anchor'' 
for employee based size standards (except for Wholesale Trade and 
Retail Trade). If the characteristics of a specific industry under 
review were similar to the average characteristics of industries in the 
anchor group, SBA generally adopted the anchor as the appropriate size 
standard for that

[[Page 18477]]

industry. If the specific industry's characteristics were significantly 
higher or lower than those for the anchor group, SBA assigned a size 
standard that was higher or lower than the anchor. To determine a size 
standard above or below the anchor size standard, SBA evaluated the 
characteristics of a second comparison group. For industries with 
receipts based size standards, the second comparison group consisted of 
industries with size standards between $23 million and $35.5 million, 
with the weighted average size standard for the group equaling $29 
million. For manufacturing industries and other industries with 
employee based size standards (except for Wholesale Trade and Retail 
Trade), the second comparison group included industries with a size 
standard of 1,000 employees or 1,500 employees, with the weighted 
average size standard of 1,323 employees. Using the anchor size 
standard and average size standard for the second comparison group, SBA 
computed a size standard for an industry's characteristic (factor) 
based on the industry's position for that factor relative to the 
average values of the same factor for industries in the anchor and 
second comparison groups.
    In the past, including the recent review of size standards, the 
anchor size standards applied to a large number of industries, making 
them a good reference point for evaluating size standards for 
individual industries. For example, at the start of the recent review 
of size standards, the $7 million (now $7.5 million due to the 
adjustment for inflation in 2014) anchor standard was the size standard 
for more than 70 percent of industries that had receipts based size 
standards. Similarly, a similar proportion of industries with employee 
based size standards had the 500-employee anchor standard. However, 
when the characteristics of those industries were evaluated 
individually, for a large majority of them the results yielded a size 
standard different from the applicable anchor. Consequently, now just 
24 percent industries with receipts based size standards and 22 percent 
of those with employee based size standards have the anchor size 
standards. Additionally, section 3(a)(7)) of the Act limits the SBA's 
ability to create common size standards by grouping industries below 
the 4-digit NAICS level. The ``anchor'' approach would entail grouping 
industries from different NAICS sectors, thereby making it inconsistent 
with the statute.
    Under the ``percentile'' approach, in the Revised Methodology, SBA 
will rank each industry within a group of industries with the same 
measure of size standards using each of the four industry factors. As 
stated earlier, these four industry factors are average firm size, 
average assets size as proxy for startup costs and entry barriers, 
industry competition (4-firm concentration ratio), and distribution of 
firms by size (Gini coefficient). As detailed in the Revised 
Methodology, the size standard for an industry for a specific factor 
will be derived based on where the factor of that industry falls 
relative to other industries sharing the same measure of size 
standards. If an industry ranks high for a specific factor relative to 
most other industries, all else remaining the same, a size standard 
assigned to that industry for that factor will be higher than those for 
most industries. Conversely, if an industry ranks low for a specific 
factor relative to most industries in the group, a lower size standard 
will be assigned to that industry. Specifically, for each industry 
factor, an industry is ranked and compared with the 20th percentile and 
80th percentile values of that factor among the industries sharing the 
same measure of size standards (i.e., receipts or employees). Combining 
that result with the 20th percentile and 80th percentile values of size 
standards among the industries with the same measure of size standards, 
SBA computes a size standard supported by each industry factor for each 
industry. The Revised Methodology provides detailed illustration of the 
statistical analyses involved in this approach.

Number of Size Standards

    To simplify size standards, in its Methodology used in the recent 
review, SBA applied a limited number of fixed size standards: eight 
revenue based size standards and eight employee based size standards. 
In response to comments against the fixed size standards approach (as 
discussed above) and section 3(a)(8) of the Act requiring SBA to not 
limit the number of size standards, in the Revised Methodology, SBA has 
relaxed the limitation on the number of small business size standards. 
Specifically, SBA will calculate a separate size standard for each 
NAICS industry, with a calculated receipts-based size standard rounded 
to the nearest $500,000 and a calculated employee-based size standard 
rounded to the nearest 50 employees for Manufacturing and industries in 
other sectors (except Wholesale Trade and Retail Trade) and to the 
nearest 25 employees for Wholesale Trade and Retail Trade.
    However, as a policy decision, SBA will continue to maintain the 
minimum and maximum size standard levels. Accordingly, SBA will not 
generally propose or adopt a size standard that is either below the 
minimum or above the maximum level, even though the calculations might 
yield values below the minimum or above the maximum level. The minimum 
size standard generally reflects the size a small business should be to 
have adequate capabilities and resources to be able to compete for and 
perform Federal contracts. On the other hand, the maximum size standard 
represents the level above which businesses, if qualified as small, 
would cause significant competitive disadvantage to smaller businesses 
when accessing Federal assistance. SBA's proposed minimum and maximum 
size standards are shown in Table 1, ``Minimum and Maximum Receipts and 
Employee Based Size Standards,'' below.

                     Table 1--Minimum and Maximum Receipts and Employee Based Size Standards
----------------------------------------------------------------------------------------------------------------
         Type of size standards                         Minimum                             Maximum
----------------------------------------------------------------------------------------------------------------
Receipts-based size standards (excluding  $5 million........................  $40 million.
 agricultural industries in Subsectors
 111 and 112).
Receipts-based size standards for         $1 million........................  $5 million.
 agricultural industries in Subsectors
 111 and 112.
Employee-based standards for              250 employees.....................  1,500 employees.
 Manufacturing and other industries
 (except Wholesale and Retail Trade).
Employee-based size standards in          50 employees......................  250 employees.
 Wholesale and Retail Trade.
----------------------------------------------------------------------------------------------------------------

    With respect to receipts based size standards, SBA is proposing $5 
million and $40 million, respectively, as the minimum and maximum size 
standard levels (except for most agricultural industries in Subsectors 
111 and 112).

[[Page 18478]]

These levels reflect the current minimum receipts-based size standard 
of $5.5 million and the current maximum of $38.5 million, rounded for 
simplicity. Section 1831 of NDAA 2017 amended the Act directing SBA to 
establish and review size standards for agricultural enterprises in the 
same manner it establishes and reviews size standards for all other 
industries. However, the evaluation of the industry data from the 2012 
Census of Agriculture seems to suggest that $5 million minimum and $40 
million maximum size standards would be too high for agricultural 
industries in Subsectors 111 and 112. Accordingly, SBA proposes $1 
million as the minimum size standard for industries in Subsector 111 
(Crop Production) and Subsector 112 (Animal Production and 
Aquaculture). A vast majority of agricultural industries in those 
subsectors currently have a $750,000 receipts-based size standard, 
which was established by Congress in 2000 (Pub. L. 106-554, 114 Stat. 
2763, Dec. 21, 2000). Considering inflation since then, that is 
equivalent to a little over $1 million today. Based on the evaluation 
of the industry data, SBA is proposing $5 million as the maximum size 
standard for agricultural industries in those two subsectors. Regarding 
employee based size standards, SBA's proposed minimum and maximum 
levels for manufacturing and other industries (excluding Wholesale and 
Retail Trade) reflect the current minimum and maximum size standards 
among those industries. For employee based size standards for wholesale 
and retail trade industries, the proposed minimum and maximum values 
are the same as what SBA proposed in its 2009 Methodology.

Evaluation of Federal Contracting Factor

    For some relevant industries, SBA considers Federal contracting as 
one of the primary factors when establishing, reviewing, or revising 
size standards. To choose which industries in which to consider the 
Federal contracting factor, under the previous methodology, SBA 
evaluated Federal contracting factor for industries with $100 million 
or more in Federal contract dollars annually for the latest three 
fiscal years. However, the latest FPDS-NG data suggests that the $100 
million threshold used in the previous methodology is too high, 
rendering the Federal contracting factor irrelevant for about 73 
percent of industries (excluding wholesale trade and retail trade 
industries that are not used for Federal contracting purposes), 
including those for which the Federal contracting factor is significant 
(i.e., the small business share of industry's total receipts exceeding 
the small business share of industry's total contract dollars by 10 
percentage points or more). Thus, SBA determined that the threshold 
should be lowered. In this revised methodology, SBA generally evaluates 
the Federal contracting factor for industries with $20 million or more 
in Federal contract dollars annually for the latest three fiscal years. 
Under the $20 million threshold, excluding wholesale trade and retail 
trade industries, nearly 50 percent of all industries would be 
evaluated for the Federal contracting factor as compared to about 27 
percent under the $100 million level.
    For each industry averaging $20 million or more in Federal contract 
dollars annually, SBA compares the small business share of total 
Federal contract dollars to the share of total industrywide receipts 
attributed to small businesses. In general, if the share of Federal 
contract dollars awarded to small businesses in an industry is 
significantly smaller than the small business share of total industry's 
receipts, keeping everything else the same, a justification would exist 
for considering a size standard higher than the current size standard. 
In cases where small business share of the Federal market is already 
appreciably high relative to the small business share of the overall 
market, it would generally support the current size standards.
    In the Methodology used in the recent review of size standards, SBA 
evaluated the Federal contracting factor only for those industries that 
averaged $100 million or more in Federal contracts annually. The latest 
FPDS-NG data suggests that the $100 million threshold is too high, 
rendering the Federal contracting factor irrelevant for about 73 
percent of industries. Accordingly, in the Revised Methodology, SBA 
evaluates the Federal contracting factor for industries (except those 
in Wholesale Trade and Retail Trade) averaging $20 million or more in 
Federal contract dollars annually. Because NAICS codes in Wholesale 
Trade and Retail Trade do not apply to Federal procurement, SBA does 
not consider the Federal contracting factor for evaluating size 
standards industries in those sectors.

Evaluation of Industry Competition

    For the reasons provided in the Revised Methodology, SBA continues 
to use the 4-firm concentration ratio as a measure of industry 
competition. In the past, SBA did not consider the 4-firm concentration 
ratio as an important factor in size standards analysis when its value 
was below 40 percent. If an industry's 4-firm concentration ratio was 
40 percent or higher, SBA used the average size of the four largest 
firms as a primary factor in determining a size standard for that 
industry. In response to the comment as well as based on its own 
evaluation of industry factors, in the Revised Methodology, SBA is 
proposing to apply all values of the 4-firm concentration ratios 
directly in the analysis, as opposed to using the 40 percent rule. 
Based on the 2012 Economic Census data, the 40 percent rule applies 
only to about one-third of industries for which 4-firm ratios are 
available. For the same reason, SBA is also dropping the average firm 
size of the four largest firms. Moreover, the four-firm average size is 
found to be highly correlated with the weighted average firm size, 
which is used as a measure of average firm size.

Summary of and Reasons for Changes

    Table 2, ``Summary of and Reasons for Changes,'' below, summarizes 
what has changed from the current methodology to the revised one and 
impetus for such changes, specifically whether the changes reflect the 
statutory requirements, public comments on the current methodology, or 
analytical improvements/refinements based on SBA's own review of the 
methodology.

[[Page 18479]]



                                   Table 2--Summary of and Reasons for Changes
----------------------------------------------------------------------------------------------------------------
           Process/factor                    Current                 Revised                    Reason
----------------------------------------------------------------------------------------------------------------
Industry analysis..................  ``Anchor'' approach.    ``Percentile''           Section 3(a)(7))
                                      Average                 approach. The 20th      of the Small Business Act
                                      characteristics of      percentile and 80th     limits use of common size
                                      industries with so      percentile values for   standards only to the 4-
                                      called ``anchor''       industry                digit NAICS level.
                                      size standards formed   characteristics form    The percentage of
                                      the basis for           the basis for           industries with ``anchor''
                                      evaluating individual   evaluating individual   size standards decreased
                                      industries.             industries.             from more than 70 percent
                                                                                      at the start of the recent
                                                                                      size standards review to
                                                                                      less than 25 percent
                                                                                      today.
                                                                                      Some public
                                                                                      comments objected to the
                                                                                      ``anchor'' approach as
                                                                                      being outdated and not
                                                                                      reflective of current
                                                                                      industry structure.
Number of size standards...........  The calculated size     Each NAICS industry is   Section 3(a)(8) of
                                      standards were          assigned a specific     the Small Business Act
                                      rounded to one of the   size standard, with a   mandates SBA to not limit
                                      predetermined fixed     calculated receipts-    the number of size
                                      size standards          based standard          standards and to assign an
                                      levels. There were      rounded to the          appropriate size standard
                                      eight fixed levels      nearest $500,000 and    for each NAICS industry.
                                      each for receipts-      a calculated employee-  Some public
                                      based and employee      based standard          comments also raised
                                      based standards.        rounded to 50           concerns with the fixed
                                                              employees (to 25        size standards approach.
                                                              employees for
                                                              Wholesale and Retail
                                                              Trade).
Federal contracting factor.........  Evaluated the small     Each industry with $20   The $100 million
                                      business share of       million or more in      threshold excludes about
                                      Federal contracts vis-  Federal contracts       73 percent of industries
                                      [agrave]-vis the        annually is evaluated   from the consideration of
                                      small business share    for the Federal         the Federal contracting
                                      of total receipts for   contracting factor.     factor. Lowering that
                                      each industry with                              threshold to $20 million
                                      $100 million or more                            increases the percentage
                                      in Federal contracts                            of industries that will be
                                      annually.                                       evaluated for the Federal
                                                                                      contracting factor to
                                                                                      almost 50 percent.
                                                                                      Evaluating more
                                                                                      industries for the Federal
                                                                                      contracting factor also
                                                                                      improves the analysis of
                                                                                      the industry's competitive
                                                                                      environment pursuant to
                                                                                      section 3(a)(6) of the
                                                                                      Small Business Act.
Industry competition...............  Was considered as       Considers all values     Some commenters
                                      significant factor if   of the 4-firm           opposed using the 40
                                      the 4-firm              concentration ratio     percent threshold and
                                      concentration ratio     and calculates the      recommended using all
                                      was 40 percent or       size standard based     values of the 4-firm
                                      more and 4-firm         directly on the 4-      concentration ratio.
                                      average formed the      firm ratio.             The 4-firm average
                                      basis for the size      Industries with a       is highly correlated with
                                      standard calculation    higher (lower) 4-firm   the weighted average.
                                      for that factor.        concentration ratio
                                                              will be assigned a
                                                              higher (lower)
                                                              standard.
----------------------------------------------------------------------------------------------------------------

Impacts of Changes in the Methodology

    To determine how the above changes in the methodology would affect 
size standards across various industries and sectors, SBA estimated new 
size standards using both the ``anchor'' approach and the 
``percentile'' approach for each industry (except those in Sectors 42 
and 44-45, and Subsectors 111 and 112). For receipts-based size 
standards, the anchor group consisted of industries with the $7.5 
million size standard, and the higher size standard group included 
industries with the size standard of $25 million or higher, with the 
weighted average size standard of $33.2 million for the group. 
Similarly, for employee-based size standards the anchor group comprised 
industries with the 500-employee size standard, and higher size 
standard group comprised industries with size standard of 1,000 
employees or above, with the weighted average size standard of 1,182 
employees. These and 20th percentile and 80th percentile values for 
receipts-based and employee-based size standards are shown, below, in 
Table 3, ``Reference Size Standards under Anchor and Percentile 
Approaches.''

                    Table 3--Reference Size Standards Under Anchor and Percentile Approaches
----------------------------------------------------------------------------------------------------------------
                                                          Anchor approach               Percentile approach
                                                 ---------------------------------------------------------------
                                                                                       20th            80th
                                                   Anchor level    Higher level     percentile      percentile
----------------------------------------------------------------------------------------------------------------
Receipts standard ($ million)...................            $7.5           $33.2            $7.5           $32.5
Employee standard (no. of employees)............             500           1,182             500           1,250
----------------------------------------------------------------------------------------------------------------

    Under the anchor approach, we derived the average value of each 
industry factor for industries in the anchor groups as well as those in 
the higher size standard groups. In the percentile approach, the 20th 
percentile and 80th percentile values were computed for each industry 
factor. These results are presented, below, in Table 4, ``Industry 
Factors under Anchor and Percentile Approaches.'' As shown in the 
table, generally, the anchor values are comparable with the 20th 
percentile values and higher level values are comparable with the 80th 
percentile values.

[[Page 18480]]



                        Table 4--Industry Factors Under Anchor and Percentile Approaches
----------------------------------------------------------------------------------------------------------------
                                                          Anchor approach               Percentile approach
                                                 ---------------------------------------------------------------
                                                                                       20th            80th
                                                   Anchor level    Higher level     percentile      percentile
----------------------------------------------------------------------------------------------------------------
              Industry factors for receipts-based size standards, excluding Subsectors 111 and 112
----------------------------------------------------------------------------------------------------------------
Simple average receipts size ($ million)........            0.78            7.09            0.83            7.65
Weighted average receipts size ($ million)......           18.07          724.84           19.42          834.75
Average assets size ($ million).................            0.35            4.73            0.34            5.17
4-firm concentration ratio (%)..................            10.4            34.5             7.9            42.4
Gini coefficient................................           0.679           0.830           0.686           0.835
----------------------------------------------------------------------------------------------------------------
               Industry factors for employee-based size standards, excluding Sectors 42 and 44-45
----------------------------------------------------------------------------------------------------------------
Simple average firm size (no. of employees).....            33.4            98.2            29.6           122.7
Weighted average firm size (no. of employees)...           232.2         1,362.6           251.3         1,581.6
Average assets size ($ million).................            4.82           23.29            3.92           40.62
4-firm concentration ratio (%)..................            24.8            50.3            24.8            61.7
Gini coefficient................................           0.770           0.842           0.760           0.853
----------------------------------------------------------------------------------------------------------------

    Under the anchor approach, using the anchor size standard and 
average size standard for the higher size standard group, SBA computed 
a size standard for an industry's characteristic (factor) based on that 
industry's position for that factor relative to the average values of 
the same factor for industries in the anchor and higher size standard 
groups. Similarly, for the percentile approach, combining the factor 
value for an industry with the 20th percentile and 80th percentile 
values of size standards and industry factors among the industries with 
the same measure of size standards, SBA computed a size standard 
supported by each industry factor for each industry. Under the both 
approaches, a calculated receipts-based size standard was rounded to 
the nearest $500,000 and a calculated employee-based size standard was 
rounded to the nearest 50 employees.
    With respect to the Federal contracting factor, for each industry 
averaging $20 million or more in Federal contracts annually, SBA 
considered under both approaches the difference between the small 
business share of total industry receipts and that of Federal contract 
dollars under the current size standards. Specifically, under the 
Revised Methodology, the existing size standards would increase by 
certain percentages when the small business share of total industry 
receipts exceeds the small business share of total Federal contract 
dollars by 10 percentage points or more. Those percentage increases, 
detailed in the Revised Methodology, to existing size standards 
generally reflect receipts and employee levels needed to bring the 
small business share of Federal contracts at par with the small 
business share of industry receipts.
    The results were generally similar between the two approaches in 
terms of changes to the existing size standards, with size standards 
increasing for some industries and decreasing for others under both 
approaches. Most impacted sector was NAICS Sector 23 (Construction), 
with a majority of industries experiencing decreases to the current 
size standard affecting about 1 percent of all firms in that sector 
under both approaches. Other negatively impacted sectors under both 
approaches were Sector 31-33 (Manufacturing), Sector 48-49 
(Transportation and Warehousing), and Sector 51 (Information), 
affecting, respectively, 0.1 percent, 0.6 percent, and less than 0.1 
percent of total firms in those sectors, with slightly higher impacts 
under the percentile approach. All other sectors would see moderate 
positive impacts under both approaches, impacting 0.1-0.2 percent of 
all firms in most of those sectors. Overall, the changes to size 
standards as the result of the changes in the methodology, if adopted, 
would have a minimal impact on number businesses that qualify as small 
under the existing size standards. Excluding NAICS Sectors 42 and 44-45 
and Subsectors 111 and 112, 97.74 percent of businesses would qualify 
as small under the new calculated size standards using the ``anchor'' 
approach vs. 97.69 percent qualifying under the ``percentile'' approach 
in the Revised Methodology. Under the current size standards, 97.73 
percent of businesses are classified as small.

Alternative Size Standards Methodologies Considered

    The Revised Methodology presents the current size standards 
methodology employed by SBA. Certainly other methodologies may be 
developed by applying different assumptions, data sources, and 
objectives. Over the years, SBA has refined its methodology within a 
consistent conceptual framework based on the analysis of industry and 
relevant program data. Several alternative methodologies have been 
suggested to SBA. In critiquing these, SBA has continued to believe 
that its historical methodology is sound and adequate because it has 
resulted in size standards that have been widely accepted by the public 
and found to be effective in providing Federal assistance to small 
businesses. Below is a brief description and evaluation of four 
alternative methodologies suggested to SBA.

Financial Performance Analysis

    Industry and financial analysts assess the economic viability of 
businesses using various financial performance indicators, such as 
return to capital (assets), gross margins, net worth, etc. Several 
private organizations and government agencies aggregate financial data 
at the firm level to derive the corresponding data at the industry 
level. Pursuant to the Small Business Act aimed at assisting businesses 
that are competitively disadvantaged, financial performance indicators 
may provide an alternative basis for developing small business size 
standards.\1\
---------------------------------------------------------------------------

    \1\ See Jim Blum (1991) for evaluation of financial performance 
analysis as an alternative tool for establishing size standards. Jim 
was a MBA intern under Gary Jackson, Director of Size Standards.
---------------------------------------------------------------------------

    This approach may provide a basis for identifying businesses, 
which, due to their size, may be underperforming relative to 
established industry norms. This, in turn, would form a basis for 
establishing size standard levels that can target businesses that are 
in need of Federal assistance.

[[Page 18481]]

    The major disadvantage of the financial performance analysis 
approach is, however, the lack of robust and consistent data across 
industries for several reasons. First, financial data are not available 
for all industries at the 6-digit NAICS level, especially the 
distribution of businesses by size. Second, data at the industry level 
or by size class may be based only on a limited sample of businesses. 
Third, financial data are also likely to be riddled with measurement 
errors and accounting holes. These problems as well as concerns related 
to how businesses are classified in an industry and the treatment of 
affiliates may limit the applicability of available financial data to 
size standards analysis. More importantly, there is not necessarily a 
robust correlation between financial performance measures and size of a 
business. For example, during economic downturns even very large 
businesses may perform very poorly in terms of financial indicators, 
thereby potentially qualifying them as small businesses under size 
standards based on financial measures.
    Given above problems with financial data and possibilities of very 
large businesses of being qualified as small based on financial 
indicators, SBA has determined that a financial performance analysis 
alone is not applicable to developing small business size standards. 
However, SBA will explore if certain financial indicators can be 
incorporated into the existing size standards methodology as additional 
factors.

Size Standards Based on Program Objectives

    Federal contracting and some SBA financial programs have 
established specific objectives (targets) in providing assistance to 
small businesses. Some industrial economists suggest that varying size 
standards may serve as a tool in ensuring that small businesses are 
receiving the targeted level of Federal assistance.\2\
---------------------------------------------------------------------------

    \2\ CONSAD. Proposed Options for Settings Business Size 
Standards.
---------------------------------------------------------------------------

    The advantage of this approach is that SBA and other Federal 
agencies can identify and estimate gaps between their predetermined 
objectives and current levels of attainment for an individual industry 
or a group of industries. Based on these gaps and the expected impacts 
of changes in current levels of size standards on program objectives, 
revised levels of size standards can be established. If an industry's 
gap in attainment of an objective is positive, its size standard can be 
reduced. Similarly, if the gap is negative, the level of associated 
size standard can be increased. Through repeated (iterative) 
adjustments of size standards this way would result in higher degrees 
of attainment of various objectives and produce uniform levels of size 
standards for similar groups of industries.
    There are several serious flaws with this approach. First, the size 
standard becomes a function of a size of business supporting some 
predetermined levels of program objectives instead of identifying 
businesses that are, due to their size and other reasons, in a 
competitively disadvantaged position and need Federal assistance. 
Second, the approach generates fluctuating size standards based on past 
trends of small business assistance as opposed to those based on 
current needs of small businesses. Third, this approach assumes that 
the decision to approve a loan or award a contract is based primarily 
on the size of a business size rather than its credit worthiness or 
capabilities to execute Federal contracts. Fourth, the necessary data 
to evaluate the size standards are not available on a timely basis. For 
example, detailed industry data are available only once every five 
years. Similarly, verified Federal contacting data usually have least 
one year time lag. Finally, this approach would require establishing 
size standards on a program-by-program basis, thereby making size 
standards more complex and confusing to users.
    For the above reasons, SBA does not apply this approach for 
establishing size standards. The Agency feels that a size standards 
methodology must focus on identifying businesses that are in need of 
assistance as opposed to what level of assistance is provided under a 
particular program. SBA considers the small business participation in 
Federal contracting and SBA financial programs as one of the five 
factors in its current methodology. The frequent adjustment of size 
standards under this approach would create a high level of uncertainty 
among small businesses and overwhelm the regulatory process. This 
approach would be more appropriate as a program evaluation tool rather 
than a size standards methodology.

Size Standards Based on General and Administrative Workforce

    A size standard for an industry may also be developed by examining 
the level of general and administrative workforce needed for a business 
to be competitive and calculating the amount of revenues at that level 
of workforce. General and administrative workers do not directly 
contribute to revenues of a business and must be supported by revenues 
generated from the goods and services produced. Total revenues needed 
to support the general and administrative workforce for a competitive 
business can be calculated based on average overhead rates, general and 
administrative compensation, fess, direct labor costs, materials, and 
subcontractor costs for a relevant industry.
    This approach takes into consideration at what size a business 
becomes competitive. It attempts to identify the size of business that 
has overcome the competitive disadvantages associated with size.
    The primary disadvantage of this approach is its reliance on an 
assumption that there exists a level of general and administrative 
workforce for a business to be competitive. There are no data sources 
that objectively provide that information. This approach also suffers 
from several methodological flaws, the most significant of which is 
inferring specific business level experience to the industry level. The 
type of data necessary to perform the calculation may be biased towards 
large businesses that are more likely to report such data.
    SBA does not use this approach because of the degree of 
arbitrariness of the underlying assumption. Moreover, this approach is 
likely to result in a much higher level of size standard, while an 
industry comprises a large number of competitive businesses below that 
level.

Size Standards Based on Qualitative Characteristics

    While most size standards methodologies tend to define a small 
business in quantitative terms (e.g., the number of employees, annual 
receipts, amount of assets, etc.), some business analysts and industry 
economists have also attempted to define a small business in 
qualitative terms. Under this approach, certain characteristics are 
used to differentiate businesses that are small from those that are not 
small. Some of the most commonly cited characteristics in the 
literature include the management and ownership structure of the 
business, control and decision making process, and sources of 
financing. Specifically, small businesses tend to share the following 
characteristics: They are independently owned and operated; they are 
closely controlled by owners/managers who also contribute most of the 
operating

[[Page 18482]]

capital; and principal decision making functions rest with owners/
managers.\3\
---------------------------------------------------------------------------

    \3\ See Holmes and Gibson (2001) for a detailed analysis of 
various quantitative and qualitative definitions of small business.
---------------------------------------------------------------------------

    This approach resolves the inherent arbitrariness associated a 
strict numerical definition. It also focuses on the notion of what 
factors distinguish a business as small relative to a competitively 
viable business operation.
    The most obvious disadvantage of this approach rests with the 
ability of SBA to verify the small business status. An on-site review 
of the business would have to be conducted to determine small business 
status. Also, businesses would not have definitive criteria to quickly 
assess their small business status. The difficulty of obtaining a 
consensus on what characteristics to examine and their interpretation 
would render the implementation of a qualitative small business size 
standard more contentious than a numerical approach.
    The requirement to establish a definitive and easily verifiable 
small business size standard precludes this approach as an alternative 
size standards methodology for SBA.

Request for Comments

    In addition to comments on the various policy issues, SBA welcomes 
comments from the public on a number of other issues concerning its 
size standards methodology. Specifically, SBA invites feedback and 
suggestions on the following:
     Should SBA establish size standards that are higher than 
industry's entry-level business size? SBA generally sets size standards 
higher than the entry-level business size to enable small businesses to 
compete against others of their size and (often) considerably larger 
businesses for Federal contracts set aside for small businesses. It is 
important that small businesses be able to apply for and be eligible 
for SBA's various business development programs that have additional 
requirements, such as a minimum number of years in business to qualify 
for its 8(a) Business Development Program. This precludes setting size 
standards at too low a level or at the entry-level size. Additionally, 
establishing size standards at the industry entry-level firm size would 
cause small businesses to outgrow their eligibility very quickly, 
thereby lacking sufficient cushion or experience to succeed outside of 
the small business market and leading to their demise. Finally, size 
standards must be above the entry-level size to ensure small businesses 
have necessary resources and capabilities to be able to perform and 
meet Federal government contracting requirements.
     Should size standards vary from program to program? In 
other words, should SBA establish one set of standards for SBA loan 
programs, another for Federal procurement, or yet another for other 
Federal programs? SBA had, in the 1980s, established different size 
standards for different programs. The result had been that some firms 
were small for some programs and large for others. Such size standards 
were very confusing to users and caused unnecessary and unwanted 
complexity in their application. The statutory guidance encourages an 
industry-by-industry analysis and not a program-by-program analysis 
when developing small business size definitions. While the 
characteristics and needs of a particular SBA program may necessitate 
the deviation from the uniform size standards, the Agency will continue 
its general policy of favoring one set of size standards for all 
programs. However, SBA has established 13 special size standards for 
some activities within certain industries for Federal government 
purposes. Similarly, for industries in Wholesale Trade and Retail 
Trade, SBA has established industry specific size standards for SBA's 
loan and Federal nonprocurement programs and a common 500-employee size 
standard for Federal procurement under the nonmanufacturer rule. 
Additionally, for SBA's SBIC, 7(a), and CDC/504 Programs businesses can 
qualify either based on industry specific size standards for their 
primary industries or based a tangible net worth and net income based 
alternative size standard.
     Should size standards apply nationally or should they vary 
geographically? The data SBA obtains from the Economic Census are 
national data. While the Economic Census does publish a Geographic 
Series of the data, application of those data to evaluating and 
establishing size standards would be cumbersome and time consuming at 
best, resulting in a very complex set of size standards that would 
likely be unusable. For example, in Federal contracting, how would a 
contracting officer set the size standard on a contracting opportunity? 
Would it depend on the contracting officer's location? On the location 
of the Agency's headquarters? On the place of delivery of the product 
or service? What about multiple delivery locations? On the location of 
the prospective contractor? On the location of the prospective 
contractor's headquarters? What if that were not in the U.S.? What 
about subcontractors, since size standards apply to their contracts as 
well? The same questions could be asked about them, which would affect 
a prime contractor's ability to bid. Would this encourage firms to 
relocate based upon perceived favorable size standards? That would 
defeat the purpose behind geographic distinctions. The undue complexity 
and resulting confusion would render geographic size standards 
unusable, for all practical purposes.
     Should there be a single basis for size standards--i.e., 
should SBA apply the number of employees, receipts, or some other basis 
to establish its size standards for all industries? SBA considered 
having a single basis for its size standards in the past. In 2004, SBA 
proposed to establish all size standards based on number of employees. 
This proposal received mixed comments from the public SBA withdrew the 
proposal. Commenters viewed either that either receipts was a more 
suitable measure of size for many industries or that the proposed 
employment levels were too low.
     Should there be a ceiling beyond which a business concern 
cannot be considered as small? In other words, should there be a 
maximum size standard? SBA has not increased its employee based 
standards beyond the 1,500-employee level. However, receipts based size 
standards have gradually increased over time and the highest standard 
stands at $38.5 million today. This is a policy decision that the 
Agency should make--is there a size beyond which a business is not 
small?
     Should there be a fixed number of size standard ranges or 
``bands'' as SBA applied for the recently completed comprehensive size 
standards review? This was one of the issues to which SBA sought 
comments in the recent review and generally received favorable comments 
from the public. However, NDAA 2013 amended the statute requiring SBA 
not to limit the number of size standards and assign the appropriate 
size standard to each NAICS industry. Similarly, should SBA establish a 
common size standard for related industries even though the data may 
support different size standards for individual industries?
     Should SBA consider adjusting employee based size 
standards for labor productivity growth or increased automation? Just 
as firms in industries with receipts based standards may lose small 
business eligibility due to inflation, firms in industries with 
employee based standards may gain eligibility due to improvement in 
labor productivity. While the original $1 million receipts based size 
standard has

[[Page 18483]]

now increased to $7.5 million due to adjustments for inflation, the 
500-employee manufacturing size standard set at the inception of SBA 
has remained the same.
     Should SBA consider lowering its size standards? SBA 
receives periodic comments from the public that its standards are too 
high in certain industries or for certain types of Federal contracting 
opportunities. The comments generally concern the competitive edge that 
large small businesses have over the ``truly small businesses'' (a 
phrase heard frequently from commentators). This has always been a 
challenging issue, one that SBA has had to deal with over the years. 
SBA's size standards appear large to the smallest of small businesses 
while larger small businesses often request even higher size standards. 
In the recently completed comprehensive size standards review, in view 
of weak economic conditions and various measures Federal Government 
implemented to stimulate employment and economic growth, SBA decided to 
not lower size standards even if the data supported lowering them. This 
issue is partly tied to Federal procurement trends of contracts getting 
larger over time, and they are often out of the reach of the ``truly 
small businesses.''
     Should SBA size standards be specific, i.e., to the 
precise dollar calculated based on the data and information it 
evaluates? Or should SBA recognize that there are other factors that go 
into establishing size standards, such as the fact that the data SBA 
evaluates is not static, industries change over the years, and even 
within a given year.
     Should SBA round off its calculated size standards for the 
various industries? If so, should SBA always round up? To what level? 
If not, what about those industries that do not get increases in size 
standards when others are? What should be the cut-off point for 
rounding either one way or the other?
     SBA's new percentile approach to evaluating industry 
characteristics, which will replace the ``anchor'' size standards 
approach the Agency used in the past.
     Alternative methodologies for determining small business 
size standards.
     How SBA's size standards impact competition in general and 
within a specific industry?
     Alternative or additional factors that SBA should 
consider.
     Whether SBA's approach to small business size standards 
makes sense in the current economic environment.
     Whether there are gaps in SBA's methodology because of the 
lack of comprehensive industry and Federal market data.
     Alternative or other factors or data sources SBA should 
consider when establishing, reviewing, or modifying size standards.
    SBA encourages the public to review and comment on the Revised 
Methodology, which is available at https://www.sba.gov/size-standards-methodology as well as at https://www.regulations.gov. SBA will 
thoroughly evaluate and consider all comments and suggestions when 
finalizing the Revising Methodology, which the Agency will apply in the 
forthcoming, second five-five year review of size standards as required 
by the Jobs Act.

    Dated: April 13, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-08418 Filed 4-26-18; 8:45 am]
 BILLING CODE 8025-01-P