Small Business Size Standards: Revised Size Standards Methodology, 14587-14596 [2019-07130]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 84, Number 70 (Thursday, April 11, 2019)]
[Rules and Regulations]
[Pages 14587-14596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-07130]



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Rules and Regulations
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Federal Register / Vol. 84, No. 70 / Thursday, April 11, 2019 / Rules 
and Regulations

[[Page 14587]]



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.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) advises 
the public that it has revised its size standards methodology white 
paper explaining how it establishes, reviews, or revises small business 
size standards. The revised white paper, entitled ``SBA's Size 
Standards Methodology (April 2019)'' (Revised Methodology) is available 
on the SBA's website at https://www.sba.gov/size-standards-methodology 
as well as on the Federal rulemaking portal at https://www.regulations.gov. SBA intends to apply the Revised Methodology to 
the ongoing second five-year comprehensive review of size standards 
required by the Small Business Jobs Act of 2010 (Jobs Act). On April 
27, 2018, SBA published a notification seeking comments on proposed 
revisions to its size standards methodology. This notification 
discusses the comments SBA received on the proposed Revised Methodology 
and Agency's responses, followed by a description of major changes to 
the methodology and their impacts on size standards.

DATES: The Revised Methodology is effective on April 11, 2019.

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

SUPPLEMENTARY INFORMATION: 

A. Background

    To determine eligibility for Federal small business assistance 
programs, SBA establishes small business definitions (commonly referred 
to as size standards) for all private 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, SBA's Small Business Investment Company 
(SBIC), 7(a), and 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 27 different industry based size 
standards, covering 1,023 North American Industry Classification System 
(NAICS) industries and 13 ``exceptions.'' Of these, 526 are based on 
average annual receipts, 505 on number of employees (one of which also 
includes barrels per day total refining capacity), and five on average 
assets.
    In 2010, Congress passed the Small Business Jobs Act (Jobs Act) 
(Sec. 1344, 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. In 2016, SBA completed the 
first 5-year review of size standards under the Jobs Act and is now 
conducting the second 5-year review of size standards. SBA also reviews 
and adjusts, as necessary, all monetary based size standards for 
inflation every five years. 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) 5-year NAICS 
revisions to its table of small business size standards. SBA adopted 
OMB's 2017 NAICS revisions for its size standards, effective October 1, 
2017 (82 FR 44886 (September 27, 2017)).
    As part of the previous comprehensive size standards review, in 
2009 SBA established a detailed size standards methodology (2009 
Methodology) explaining how SBA establishes, reviews, or adjusts size 
standards based on the evaluation of industry and Federal contracting 
factors. SBA has now revised the 2009 Methodology to incorporate the 
recent amendments to the Small Business Act (Act) relating to the 
establishment of size standards, to address public comments the Agency 
received on the 2009 Methodology, and to make certain analytical 
improvements to its size standards analysis based on its own review of 
the methodology.
    On April 27, 2018, SBA published a notification in the Federal 
Register advising the public that the Agency had revised its size 
standards methodology (Revised Methodology) and made it available on 
SBA's website at https://www.sba.gov/size-standards-methodology and on 
the Federal rulemaking portal at https://www.regulations.gov for review 
and comments (83 FR 18468). SBA proposed a number of changes to its 
size standards methodology, including moving from an ``anchor'' 
approach to a ``percentile'' approach for evaluating industry 
characteristics, assigning a separate size standard for each NAICS 
industry instead of selecting a size standard from a limited number of 
fixed size standards as in the 2009 Methodology, lowering the threshold 
for selecting industries for the evaluation of the Federal contracting 
factor to $20 million in annual Federal contracting dollars from the 
$100 million threshold as in the 2009 Methodology, and applying the 4-
firm concentration ratio to all industries, as opposed to using it only 
when the ratio is 40% or more as in the 2009 Methodology.
    SBA sought comments on these changes as well as on a number of 
policy issues/questions that the Agency faces when developing a 
methodology for establishing, evaluating, or revising its small 
business size standards, such as: Whether SBA's size standards should 
be higher than entry level business size; whether SBA should vary size 
standards from program to program or geographically; whether SBA should 
establish a ceiling or cap beyond which a business concern cannot be 
considered small; whether SBA should apply a single measure of business 
size for all industries (i.e., employees or annual receipts); and 
whether SBA should adjust employee based size standards to account for 
labor productivity, similar to the adjustment of monetary based size 
standards for inflation. The comment period for the Revised Methodology 
was from April 27, 2018 to June 26, 2018.
    SBA received a total of 14 comments on the proposed Revised 
Methodology, two of which were not pertinent and

[[Page 14588]]

were not considered. The 12 valid comments and SBA's responses thereto 
are discussed below.

B. Comments on the Proposed Revised Methodology

1. Comments on Calculation of Average Annual Receipts

    Five commenters suggested that SBA should revise its method for 
calculating the average annual receipts for size standards purposes by 
allowing firms to use the three lowest annual receipts over the 
preceding five years or, at least, to calculate the average annual 
receipts over the preceding five years, as opposed to the three 
preceding years. The commenters argued that the increased use of large 
contract vehicles (such as governmentwide acquisition vehicles or 
indefinite-delivery, indefinite-quantity contracts) to award Federal 
contracts to small businesses can cause very rapid growth in firms' 
size, thereby resulting in the loss of their small business status. The 
commenters asserted that small businesses need time to develop 
infrastructure to be able to compete for unrestricted procurements with 
large firms after graduating to other-than-small status. Commenters 
also mentioned that some industries are subject to fluctuating market 
conditions that may skew average annual receipts calculated over the 3-
year period.
    Three commenters suggested that SBA should only consider Federal 
contractor size when determining average firm size within any NAICS 
industry. They noted that including firms which do not do business with 
the Federal Government could skew the true size of businesses 
participating in Federal contracting, resulting in size standards that 
are not reflective of government buying practices.
    One commenter asserted that firms should be allowed to deduct 
subcontractor costs from annual receipts calculations. The commenter 
argued that subcontracting services can be very expensive and take up a 
substantial portion of the total contract value, at least for 
Advertising Agencies (NAICS 541810).
SBA's Response
    Any consideration to change the rule on how SBA calculates average 
annual receipts for size standards or any other part of SBA's small 
business regulations would require formal rulemaking in accordance with 
the Administrative Procedure Act. The purpose of the size standards 
methodology white paper is to explain what data sources and factors SBA 
considers when establishing and revising size standards, but not to 
change SBA's small business regulations.
    The Small Business Runway Extension Act of 2018 (Runway Extension 
Act) (Pub. L. 115-324 (Dec. 17, 2018)) amended section 
3(a)(2)(C)(ii)(II) of the Small Business Act by changing the period for 
calculation of annual average receipts of businesses providing services 
from three (3) years to five (5) years. This change to the calculation 
of annual average receipts requires the issuance of a proposed rule and 
approval by the SBA Administrator. Accordingly, SBA will be initiating 
a rulemaking to implement the new law into SBA's regulations. 
Businesses must continue to report their annual receipts based on a 3-
year average until SBA amends its regulations.
    SBA would not consider the average size of government contractors 
only as a measure of average firm size in establishing size standards 
for several reasons. First, SBA's size standards are used not only for 
Federal procurement purposes, but also for various non-procurement 
purposes, including establishing eligibility for SBA's loan programs, 
conducting flexibility regulatory analyses for Federal rulemaking under 
the Regulatory Flexibility Act, and determining eligibility for small 
business exemptions from certain Federal reporting and compliance 
requirements. Second, firms that are government contractors in an 
industry do not provide an adequate representation of all firms that 
are interested, willing, or able to perform Federal work in that 
industry. For example, of about 5.5 million employer firms in the U.S., 
only about 400,000 firms (or about 7.2 percent) are registered in the 
System for Award Management (SAM) for Federal contracting purposes, of 
which about 38 percent have received any Federal contracts during 
fiscal years 2014-2017. Third, for size standards purposes, SBA 
considers receipts from all sources (e.g., commercial, Federal, etc.) 
and the receipts data on government contractors in SAM and the Federal 
Procurement Data System--Next Generation (FPDS-NG) also include 
receipts from all sources, not just from Federal work. Fourth, as 
current size standards are, on average, several times higher than the 
average size of all firms in the industry, SBA's size standards already 
reflect that firms that receive Federal contracts are typically larger 
than all firms in the overall industry. Finally, in accordance with the 
Jobs Act, every five years, SBA reviews, and adjusts, where necessary, 
all size standards to ensure that they reflect current market 
conditions, including government buying trends.
    SBA's regulation in 13 CFR 121.104(a) provides several exclusions 
from the calculation of receipts for size standards purposes, but 
subcontracting costs is not one of them, meaning that subcontracting 
costs are part of receipts and cannot be excluded from the calculation. 
However, as stated in Footnote 10 to the SBA table of size standards, 
for certain industries, including Advertising Agencies (NAICS 541810), 
funds received in trust for an unaffiliated third party, such as 
bookings or sales subject to commissions, are excluded from receipts. 
Subcontracting occurs in most industries (although at varying degrees) 
and may even vary from firm to firm within the same industry. For 
example, while some small businesses may want to perform all or most of 
their Federal work themselves, others may elect to subcontract a large 
part or most of their work out to others. Allowing businesses to 
exclude subcontractor costs from receipts would put firms performing 
most of their work in-house in serious competitive disadvantage 
relative to those who subcontract a significant portion of their work 
out to others. This may also encourage businesses to subcontract more 
of their set-aside contract work to others to maintain their small 
business status, which would defeat the very intent of the set-aside 
program, especially if the work is subcontracted out to large 
businesses. As stated elsewhere in this notification, any consideration 
to amend the rule on how SBA defines and calculates receipts for size 
purposes would require formal rulemaking. Additionally, the methodology 
white paper is not meant to address issues concerning size standards 
for specific industries. SBA will consider such issues in future 
rulemakings as part of the ongoing second 5-year review of size 
standards under the Jobs Act.

2. Comment on Data Sources

    One commenter argued that SBA should not use the 2012 Economic 
Census data for evaluating industry characteristics. The commenter 
argued that the 2012 Economic Census only reflects industry conditions 
before 2012 and is, therefore, outdated. The commenter suggested that 
SBA should look at industry-specific publications that provide richer 
and more current industry data. To support its argument that the 
Advertising Agencies size standard should be higher than the current 
$15 million, the commenter submitted reports from the two industry 
associations.

[[Page 14589]]

SBA's Response
    While the methodology states that the 2012 Economic Census data is 
the latest available principal source of industry data that SBA uses 
for size standards analysis, SBA will consider the 2017 Economic Census 
data as it becomes available, as well as any other newer data available 
from other sources, including industry specific publications, provided 
that such data provides an accurate and comprehensive representation of 
all firms within the industry. However, many industry publications do 
not provide a comprehensive picture of the industry they represent. For 
example, the two industry associations referred to by one of the 
commenters included about 600-700 advertising agencies, whereas there 
are more than 12,000 advertising firms in the United States. SBA 
believes that, for consistency, all industries sharing the same measure 
of size standards (such as receipts based or employee based) should be 
evaluated using the single set of industry data. Moreover, the data 
from industry publications does not usually provide information on all 
industry factors that SBA examines when establishing size standards. 
Not all industries have industry publications and, where they do, the 
information is likely to be incomplete and inconsistent with the 
Economic Census data SBA uses for size standards analysis. However, SBA 
will consider any industry specific data submitted as part of the 
public comments to proposed rulemakings. Despite a time lag for the 
availability of the Economic Census data, SBA believes that the 
Economic Census is still the most consistent and comprehensive data 
available out there for evaluating industry structure to comply with 
the statutory requirement that the size standards vary from industry to 
industry in order to reflect differences in characteristics among the 
various industries.

3. Comments on Industry Analysis

    One commenter suggested using the median instead of the mean for 
average firm size calculations. The same commenter also did not see the 
usefulness of using the ``percentile'' approach in the Revised 
Methodology and asked where the ``anchor'' size standard values came 
from. Another commenter, however, agreed with SBA's proposal to replace 
the ``anchor'' approach in the 2009 Methodology with the ``percentile'' 
approach in the Revised Methodology. The commenter stated that the new 
approach provides a reasonable methodology for incorporating the 
economic characteristics of individual industries into SBA's size 
standards analysis and suggested that, for transparency, SBA should 
provide the primary factor values and associated size standards 
supported by each factor for each industry and sub-industry reviewed. 
This commenter disagreed with the idea to use the median instead of the 
mean as a measure of the average firm size.
SBA's Response
    In response to these opposing comments (i.e., one supporting the 
median and another supporting the mean), SBA conducted analyses using 
both the mean (simple average) and the median firm size. In terms of 
numbers of industries for which size standards would change or remain 
the same, the results from the two approaches were very similar for a 
large majority of industries. For most industries where the levels of 
calculated size standards differed between the two approaches, such 
differences were generally small. SBA has provided a detailed 
justification in the Revised Methodology white paper for replacing the 
old ``anchor'' approach with the new ``percentile'' approach. SBA has 
determined that the ``percentile'' approach provides a better approach 
to evaluating differences among industries and varying size standards 
accordingly. In addition, as stated in the Revised Methodology, the 
``anchor'' approach that entails grouping all industries under a common 
(so-called ``anchor'') size standard (i.e., the size standard shared by 
most industries) is inconsistent with the statute that such groupings 
should be limited to the 4-digit NAICS level. For these reasons, SBA 
will continue to use the simple average (mean) as one of the two 
measures of firm size (other being the weighted average) and is 
adopting the ``percentile'' approach to evaluate industry 
characteristics, as proposed.
    SBA does not provide in the methodology white paper the primary 
factor values and associated size standards supported for each industry 
and sub-industry in the methodology as the results are likely to change 
with the availability of new data. The methodology is intended to 
explain SBA's approach to establishing, reviewing, or adjusting size 
standards. SBA will provide such results for the public review and 
comment on individual proposed rulemakings on reviews of size standards 
for various NAICS sectors.

4. Comments on Number of Size Standards and Rounding

    One commenter agreed with SBA's approach to rounding size standards 
to the nearest $500,000 for receipts based size standards and to the 
nearest 50 employees for employee based size standards (or to the 
nearest 25 employees for employee based size standards in Wholesale 
Trade and Retail Trade). This commenter believed that the increased 
number of and reduced increments between size standards would limit the 
effect of errors, counteract the limitations of the data used by SBA in 
calculating size standards, and ensure that similar industries are 
treated in an equitable fashion, and more accurately reflect each 
industry's economic characteristics. The same commenter disagreed with 
SBA's policy of capping calculated size standards at some predetermined 
maximum levels instead of allowing the data to determine what the 
maximum size standard levels should be. If the agency decides to 
continue with this policy, the commenter suggested that capping should 
be applied for the calculation of the aggregated size standard, not for 
size standard for each factor individually. Another commenter 
questioned where do the minimum and maximum size standards levels come 
from, although they were fully explained in the proposed Revised 
Methodology.
SBA's Response
    The National Defense Authorization Act of Fiscal Year 2013 (NDAA 
2013) (Pub. L. 112-239, Section 1661, Jan. 2, 2013) amended the Small 
Business Act requiring SBA not to impose the limitation on the number 
of size standards and to establish specific size standards for each 
NAICS industry. In absence of any adverse comments to this approach, 
SBA is adopting the number of size standards and the rounding 
procedure, as proposed.
    Allowing the data alone to determine a maximum size standard would 
lead to very high size standards for some industries, thereby allowing 
very successful businesses with hundreds of millions in receipts or 
tens of thousands of employees to qualify as small and be eligible for 
Federal assistance intended for small businesses. For example, under 
receipts based size standards, if not capped, about 20 industries 
(excluding Retail Trade) would end up with a size standard of $100 
million or more (with some being as high as more than $1 billion) and 
another 30 industries would have a size standard between $50 million 
and $100 million,

[[Page 14590]]

as compared to the proposed receipts based cap of $40 million and the 
current maximum of $38.5 million. Similarly, for employee based size 
standards, about a dozen industries would end up with having a size 
standard of 5,000 employees or more (some being as large as 20,000 
employees) and another 25 would have a size standard between 2,000 
employees and 5,000 employees, as compared to the proposed and current 
maximum of 1,500 employees. From a policy standpoint, it would be 
almost impossible for SBA to justify such large businesses as small for 
Federal small business programs. Additionally, in the absence of caps, 
the calculated size standards will be very small (in some cases even 
negative) for some industries such that businesses qualifying as small 
would not only lack capabilities to meet the Federal Government small 
business procurement requirements, but also businesses graduating out 
of such small size standards would not have yet developed enough size 
to be competitive in the market and would still need Federal support to 
grow and be competitive on their own. SBA believes that such very high 
or very low size standards would not enable the Agency to effectively 
fulfill its critical mission to serve and protect the interests of 
American small businesses. Accordingly, SBA is adopting its policy of 
capping calculated size standards, both at the factor level and the 
aggregate level, at maximum or minimum values, as proposed.

5. Comments on Federal Contracting Factor

    One commenter noted the asymmetry in using the Federal contracting 
factor to increase size standards when small business Federal contract 
shares are lower than for their overall market shares while not 
decreasing them when those shares are higher than the overall market 
share. Another commenter agreed with the increased utilization of the 
Federal contracting factor for industries with at least $20 million in 
Federal contracting dollars (as opposed to a $100 million level in the 
previous methodology). This commenter felt that the adoption of a lower 
threshold allows for a more detailed analysis of competitive and 
economic characteristics of relevant industries. However, the commenter 
disagreed with SBA's use of ``maximum size caps'' as it would not 
allow, the commenter argued, the size standard to increase according to 
the Federal contracting factor.
SBA's Response
    The objective of the Federal contracting factor is to assess how 
successful small businesses have been in receiving Federal contracts 
under the current size standards and to adjust them if small businesses 
are not faring well in the Federal marketplace relative to the overall 
market, but not to penalize small businesses by lowering size standards 
where they are doing well. Generally, SBA adjusts size standards 
upwards for industries where the small business shares in the Federal 
market are substantially lower (i.e., 10 percent or more) than their 
shares in the overall market and maintains them at their current levels 
(instead of lowering them) for industries where those differences are 
less than 10 percent or where small business shares in the Federal 
market are higher than the small business shares in the overall market. 
Lowering size standards, simply because the shares of small businesses 
in the Federal contracts are higher than their shares in the industry's 
overall market, would not serve the interests of small businesses or 
contribute to SBA's mission to ensure that small businesses receive a 
fair proportion of Federal government contracts. Accordingly, for the 
Federal contracting factor, SBA will maintain size standards at their 
current levels where the small business shares of the Federal market 
are higher than the small business shares in the overall market. 
Additionally, to be consistent, SBA will apply the same capping 
procedure for all factors, including the Federal contracting factor.

6. Comments on Industry Competition

    One commenter stated that he did not feel the ``industry 
competition'' or ``size distribution of firms'' were necessary factors 
for analyzing industry structure. This commenter suggested examining a 
correlation matrix of all factors, which may result in the need of 
using only one or two factors to determine size standards. The 
commenter also insisted that the Herfindahl index is a more generally 
accepted measure of industry competitive structure and that this is 
preferable to the four- or eight-firm concentration ratio. A different 
commenter agreed with the use of a four-firm concentration ratio for 
all industries in the Revised Methodology, as opposed to using it only 
for those industries where that ratio was 40 percent or higher in the 
2009 Methodology.
SBA's Response
    The statute requires that small business definitions vary from 
industry to industry to reflect differences among the various 
industries. For that, in accordance with its regulations in 13 CFR 
121.102, SBA evaluates four industry factors, namely average firm size, 
average assets as a proxy for start-up costs and entry barriers, 
industry competition, and size distribution of firms. SBA examined 
correlations among all industry factors and found that using just one 
or two factors alone would not adequately account for differences among 
the various industries. To account for industry competition, SBA also 
tried using the Herfindahl index instead of the four-firm concentration 
ratio and the results were found to be very similar between the two 
measures. Because it is simpler and easier to explain to the public and 
it has long been used for SBA's size standards analyses, in the Revised 
Methodology, SBA is adopting the four-firm concentration ratio as a 
measure of industry competition.

7. Comments on Industry-Specific Size Standards

    Several commenters expressed various viewpoints concerning size 
standards for various industries as well as how NAICS codes should be 
defined for contracting purposes. One commenter suggested creating a 
new NAICS code to accommodate firms supplying finished products to the 
government as ``nonmanufacturers'' while also performing supply chain 
management and distribution services. Another commenter argued that the 
size standards for sale and rental of heavy equipment should be 
harmonized by changing the receipt based size standard for the 
equipment rental companies to the one that is employee based. A further 
commenter proposed adding additional sub-industry categories (or 
``exceptions'') to NAICS codes 541330, 541513, and 236220 to more 
adequately describe the scope of Federal work in these industries. This 
commenter also felt that the size standards for some industries in 
NAICS Sector 54 and Subsector 236 should be raised. Yet another 
commenter argued that the size standard for NAICS code 561440 should be 
higher than the current $15 million level. A final commenter disagreed 
with SBA's approach in a 2016 final rule to excluding the largest firms 
in its calculation of the employee based size standard for the 
Environmental Remediation Services (ERS) exception to NAICS 562910 
(Remediation Services). It further argued that no firms at the proposed 
1,250-employee size standard would have been dominant in the ERS 
industry. The same commenter also suggested that SBA should provide

[[Page 14591]]

a full description of SBA's approach to evaluating industries with size 
standards exceptions.
SBA's Response
    SBA neither defines nor modifies NAICS industry definitions. It 
simply adopts the NAICS industry definitions and their updates, as 
published by OMB. Any suggestions for the creation of new NAICS 
industry categories should be submitted during OMB's notice and comment 
process of its reviews and revisions of the NAICS definitions. Every 
five years, OMB (in coordination with government statistical agencies 
in the U.S., Canada and Mexico) reviews and modifies existing NAICS 
definitions or creates new ones to ensure that industry definitions 
reflect changes in the economy.
    Some firms may elect to both sell and rent the equipment. However, 
because firms that are primarily engaged in the equipment rental 
activity are very different from those primarily engaged in selling 
equipment (as a manufacturer or a distributor), the industry data does 
not support the same size standard for the two groups. Accordingly, 
whereas SBA's size standards for equipment rental industries are based 
on receipts, those for equipment manufacturers and distributors are 
based on employees. A firm that sells the equipment that it did not 
manufacture itself is considered a nonmanufacturer and can qualify as 
small under the 500-employee nonmanufacturer size standard.
    The size standards methodology does not revise any size standards 
as such. It only explains the methodology on how SBA establishes and 
reviews size standards. Therefore, with the release of the final 
Revised Methodology, SBA is not making any changes to any size 
standards that are currently in effect. However, as part of the ongoing 
second 5-year comprehensive review of size standards under the Jobs 
Act, SBA will review all size standards and make necessary adjustments 
in the coming years to ensure that they reflect current industry and 
Federal market conditions. The Agency plans to issue proposed rules on 
all receipts based size standards, including those in NAICS Sector 54 
and Subsector 236, in the near future. Depending upon the results from 
the analysis of the latest data available, some industries may see 
their size standards adjusted, while others may see no changes. 
Interested parties will have opportunity to comment on SBA's proposed 
size standards and suggest alternatives, along with supporting data and 
analysis, if they believe that the proposed standards are not 
appropriate.
    As the industry data from the Economic Census are limited to the 6-
digit NAICS levels, SBA does not have the necessary data to be able to 
create new sub-industry categories below the 6-digit levels and 
establish size standards thereto. SBA is already faced with difficulty 
in reviewing size standards for the existing sub-industry categories 
(``exceptions'') particularly because the industry data from SAM and 
FPDS-NG used to evaluate these ``exceptions'' are not consistent with 
the industry data from the Economic Census that SBA uses to evaluate 
industry characteristics.
    When evaluating the SAM and FPDS-NG data for reviews of size 
standards under ``exceptions,'' SBA trims the data on firms on both 
ends of the size distribution to prevent extreme observations (i.e., 
observations with questionable receipts values given the number 
employees or vice versa) from distorting the results. Additionally, to 
make the SAM and FPDS-NG data more consistent with the Economic Census 
tabulations where an industry's data only includes firms that are 
primarily engaged in that industry, SBA also removes very large firms 
for which the contribution of Federal contracts under that 
``exception'' is quite small relative to their overall enterprise 
revenues. Accordingly, SBA removed from the evaluation of the ERS size 
standard a few of the largest firms for which Federal contracts 
received under that ``exception'' accounted for less than 25 percent of 
their overall receipts. Additionally, several commenters opposing the 
proposed size standard also argued that the large, diversified 
environmental firms for which the Federal environmental remediation 
work is not their major activity should be excluded in evaluating the 
ERS size standard. While the law states that a firm qualifying as small 
should not be dominant in its industry, it does not, however, mean that 
all non-dominant firms can or should be classified as small. In 
response to the comment, in the final Revised Methodology, SBA is 
including a new section describing its general approach to evaluating 
the size standard for ``exceptions.''

8. Comments on Policy Issues

    Several commenters addressed various policy issues concerning the 
size standards methodology for which SBA sought comments and 
suggestions from interested parties. These comments are discussed 
below.
a. Should SBA establish size standards that are higher than industry's 
entry-level business size?
    One commenter stated that it made sense for size standards to be 
higher than the industry entry-level size since firms larger than 
entry-level size could still experience disadvantages in the industry. 
However, the commenter suggested imposing time limits for participation 
in SBA programs to disincentivize firms to remain at an inefficient 
size.
SBA's Response
    Except for businesses participating in the 8(a) business 
development program, SBA does not impose time limits for eligibility 
for small business programs. Doing so would be too complicated as the 
time to reach an efficient size is likely to vary from industry to 
industry and firm to firm within an industry, not to mention the 
complexity time limits would add to determining eligibility for such 
programs.
b. Should size standards vary from program to program or 
geographically?
    Two commenters agreed with SBA that varying size standards by 
program or geography would create confusion and be difficult to 
administer.
SBA's Response
    SBA's methodology provides for establishing a single set of 
industry specific size standards for both SBA's financial programs and 
Federal procurement programs. Similarly, as size standards are applied 
at the national level and market dominance is evaluated nationally, SBA 
does not vary size standards geographically.
c. 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?
    One commenter who addressed this issue asserted that receipts are 
the best measure for determining size, not gross profits. Using gross 
profits would require, the commenter maintained, SBA to review a 
concern's balance sheet, possibly with risks of disclosure of the 
concern's financial records to its competitors.
SBA's Response
    SBA does not use profits as a measure of business size for any 
industry nor does it review a concern's balance sheet or financial 
records for size standards analysis, except for size determination of a 
company whose small business size status is protested. SBA mostly uses 
either receipts or number of employees.

[[Page 14592]]

As explained in the methodology, SBA uses receipts for most services, 
retail trade, construction and agricultural enterprises and employees 
for all manufacturing, most mining and utilities, and a few other 
industries.
d. Should there be a ceiling beyond which a business concern cannot be 
considered as small?
    One commenter thought a maximum ceiling was a good idea but 
acknowledged it might be somewhat arbitrary. Another commenter strongly 
disagreed with placing ``caps'' on size standards and reasoned that SBA 
should follow the results from its analysis when establishing size 
standards and allow natural maximums to develop based on the data. The 
commenter felt that imposing caps on size standards before conducting 
the economic data analysis would be arbitrary and non-transparent.
SBA's Response
    SBA has addressed this issue elsewhere in this notice, that capping 
calculated size standards at certain minimum and maximum levels is 
crucial for fulfilling its mission to serve and protect the interests 
of American small businesses and ensuring that Federal small business 
assistance goes to small businesses in need of such assistance the 
most.
e. Should there be a fixed number of size standard ranges or ``bands'' 
as SBA applied for the recently completed comprehensive size standards 
review?
    Two commenters agreed with using ``bands'' of size standards across 
related industries. One of them further recommended putting groups of 
related industries under the same size standards. The use of size 
standard ``bands,'' the commenters noted, prevents confusion and could 
also discourage size protests.
SBA's Response
    While SBA agrees that using ``bands'' or limited number of fixed 
size standard levels (as under the previous methodology) would simplify 
size standards, it would run counter to the statute that there shall 
not be any limitation on the number of size standards and that each 
NAICS industry be assigned the appropriate size standard. SBA has, in 
the past, used common size standards for industries within certain 
NAICS Industry Groups, even if the data suggested different standards 
for individual industries in the group. However, a 2013 amendment to 
the statute limits the use of common size standards, except where a 
justification would exist for establishing a single size standard for 
industries within the 4-digit NAICS Industry Group, provided that such 
size standard is appropriate for each individual industry in the group. 
Thus, in view of these statutory limitations on the number of size 
standards and use of common size standards, SBA is adopting the size 
standards structure, as proposed.
f. Should SBA consider adjusting employee based size standards for 
labor productivity growth or increased automation?
    Three commenters disagreed with the idea of adjusting employee-
based size standards for productivity and/or automation. While one 
commenter thought that this would be arbitrary, another stated that the 
effects of productivity changes are already captured in the Economic 
Census data that SBA uses for industry analysis. The third commenter 
asserted that labor productivity changes are too small to warrant 
meaningful size standard adjustments and would already be captured in 
each 5-year comprehensive industry review. This commenter also believed 
that productivity growth would have to be accounted for on an industry-
by-industry basis which would result in a very complicated adjustment 
process.
SBA's Response
    SBA does not quite agree that adjusting employee based size 
standards for productivity would be arbitrary as there is available 
data on measures of productivity, both by industry (by NAICS subsector 
or industry group) and for the overall economy. However, SBA agrees 
that accounting for productivity changes on an industry-by-industry 
basis would entail a complicated methodology. SBA concurs with the 
commenters that the effects of productivity changes are already 
captured by the Economic Census data and would be reflected in the 5-
year size standards reviews. Accordingly, the Revised Methodology does 
not provide for adjustments to employee based size standards for 
productivity changes.
g. Should SBA consider lowering its size standards?
    One commenter stated that SBA should perhaps consider lowering size 
standards depending on the goals of its programs. Another commenter 
opposed lowering size standards in view of the government procurement 
trend of using larger and longer-term procurements.
SBA's Response
    As stated in the Revised Methodology, while the results from SBA's 
analysis of the relevant data would serve as a principal basis for 
proposing revisions to size standards, other factors (such as public 
comments, administration's policies and priorities, the current market 
conditions, and impacts on small businesses) would also be important 
when proposing or finalizing size standards revisions. When SBA decides 
to deviate from the results of its analysis, it would provide in the 
rule a detailed justification for such decisions.

C. Changes in the Revised Methodology

    The Revised Methodology, entitled ``SBA's Size Standards 
Methodology (April 2019)'', is available for review and download on the 
SBA's website at https://www.sba.gov/size-standards-methodology as well 
as on the Federal rulemaking portal at https://www.regulations.gov. It 
describes in detail how SBA establishes, evaluates, or adjusts its 
small business size standards pursuant to the 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 Act (15 U.S.C. 632(a); Pub. L. 85-536, 67 Stat. 
232, as amended) provides SBA's Administrator (Administrator) with 
authority to establish small business size standards for Federal 
government programs. The Administrator has discretion to determine 
precisely how small business size standards should be established. 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 
be to assist small businesses as a means of encouraging and 
strengthening their competitiveness in the economy. These three 
considerations continue to form the basis for SBA's methodology for 
establishing, reviewing, or revising small business size standards.

1. Industry Analysis

    SBA examines the structural characteristics of an industry as a 
basis to assess differences among the various industries and the 
overall degree of competitiveness of the industry and of firms therein. 
As described more fully in the Revised Methodology document, SBA 
generally evaluates industry

[[Page 14593]]

structure by analyzing four primary factors--average firm size (both 
the simple and weighted average), degree of competition within an 
industry (the 4-firm concentration ratio), start-up costs and entry 
barriers (average assets as a proxy), and distribution of firms by size 
(the 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 previous 
review of size standards, a recent amendment to the Act limiting the 
use of common size standards (see section 3(a)(7) of the Act under NDAA 
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 standard as the 
appropriate size standard for that 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.
    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. 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 of 
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 
ranks 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 (the 4-firm concentration ratio), and distribution of firms 
by size (the Gini coefficient). As detailed in the Revised Methodology, 
the size standard for an industry for a specific factor is 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 is 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 is 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.

2. Number of Size Standards

    SBA applied a limited number of fixed size standards in the 2009 
Methodology used in the first 5-year review of size standards: Eight 
revenue based size standards and eight employee based size standards. 
In response to comments against the fixed size standards approach 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, except for industries in NAICS Subsectors 111 
(Crop Production) and 112 (Animal Production and Aquaculture) for which 
the calculated standard is rounded to the nearest $250,000. Similarly, 
a calculated employee based size standard is rounded to the nearest 50 
employees for the manufacturing and other industries with employee 
based standards, except those in Wholesale Trade and Retail Trade for 
which the calculated standard is rounded to the nearest 25 employees.
    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 minimum and maximum size 
standards are shown in Table 1, ``Minimum and Maximum Receipts and 
Employee Based Size Standards,'' below.

[[Page 14594]]



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

    With respect to receipts based size standards, SBA is establishing 
$5 million and $40 million, respectively, as the minimum and maximum 
size standard levels (except for most agricultural industries in 
Subsectors 111 and 112). 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 the National 
Defense Authorization Act for Fiscal Year 2017 (NDAA 2017) (Pub. L. 
114-328, 130 Stat. 2000, December 23, 2016) 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. The evaluation of the industry data from the 2012 
Census of Agriculture (the latest available) 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 is establishing $1 million as the minimum size 
standard and $5 million as the maximum size standard for industries in 
NAICS Subsector 111 (Crop Production) and Subsector 112 (Animal 
Production and Aquaculture). Regarding employee based size standards, 
SBA's 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 used in its 2009 
Methodology.

3. Evaluation of Federal Contracting Factor

    For industries where Federal contracting is significant, SBA 
considers Federal contracting as one of the primary factors when 
establishing, reviewing, or revising size standards. Under the 2009 
Methodology that was applied in the previous comprehensive size 
standards review, SBA evaluated the Federal contracting factor for 
industries with $100 million or more in Federal contract dollars 
annually for the latest three fiscal years. However, the analysis of 
the FPDS-NG data suggests that the $100 million threshold is too high, 
thereby 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 the Revised Methodology, SBA 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 just about 
27 percent under the $100 million threshold. 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.
    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 10 
percentage points or more lower 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 that difference is less than 10 percent 
or the small business share of the Federal market is already higher 
than the small business share of the overall market, it would generally 
support the current size standards.

4. Evaluation of Industry Competition

    For the reasons provided in the Revised Methodology and discussed 
above with respect to the public comments, 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 public comments as well as based on its own evaluation of 
industry factors, in the Revised Methodology SBA apples 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 as an additional factor 
of industry competition. Moreover, the four-firm average size is found 
to be highly correlated with the weighted average firm size, which is 
used as one of the two measures of average firm size.

5. Summary of and Reasons for Changes

    Table 2, ``Summary of and Reasons for Changes,'' below, summarizes 
what has changed in the Revised Methodology as compared to the 2009 
Methodology and the impetus for such changes, specifically whether the 
changes are based on statute or discretionary.

[[Page 14595]]



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

6. Impacts of Changes in the Methodology

    To determine how the above changes in the methodology would 
generally affect size standards across various industries and sectors, 
SBA estimated new size standards using both the 2009 Methodology (i.e., 
``anchor'' approach) and the Revised Methodology (i.e., ``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 
1,180 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           1,180             500           1,250
----------------------------------------------------------------------------------------------------------------

    Under the anchor approach, SBA derived the average value of each 
industry factor for industries in the anchor industry 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

[[Page 14596]]

values are comparable with the 80th percentile values.

                        Table 4--Industry Factors Under Anchor and Percentile Approaches
----------------------------------------------------------------------------------------------------------------
                                                          Anchor approach               Percentile approach
                                                 ---------------------------------------------------------------
                                                                                       20th            80th
                                                      Anchor       Higher level     percentile      percentile
----------------------------------------------------------------------------------------------------------------
              Industry factors for receipts based size standards, excluding Subsectors 111 and 112
----------------------------------------------------------------------------------------------------------------
Simple average receipts size ($ million)........            0.78            6.99            0.83            7.52
Weighted average receipts size ($ million)......           18.10          685.87           19.42          830.65
Average assets size ($ million).................            0.35            5.08            0.34            5.22
Four-firm concentration ratio (%)...............            10.4            34.4             7.9            42.4
Gini coefficient................................           0.678           0.829           0.686           0.834
----------------------------------------------------------------------------------------------------------------
               Industry factors for employee based size standards, excluding Sectors 42 and 44-45
----------------------------------------------------------------------------------------------------------------
Simple average firm size (no. of employees).....            33.4            96.8            29.5           118.3
Weighted average firm size (no. of employees)...           232.2         1,371.3           250.7         1,629.0
Average assets size ($ million).................            4.79           23.34            4.14           40.54
Four-firm concentration ratio (%)...............            24.8            50.2            24.7            61.3
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 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. The sector that was most impacted 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, 97.75 percent of businesses would qualify 
as small under the new calculated size standards using the ``anchor'' 
approach vs. 97.70 percent qualifying under the ``percentile'' approach 
in the Revised Methodology. Under the current size standards, 97.73 
percent of businesses are classified as small.

D. Conclusion

    After considerations of all relevant comments, SBA is adopting the 
Revised Methodology, as proposed for comments, except that the Agency 
has now included a new section on the evaluation of size standards at 
sub-industry levels (usually referred to as ``exceptions'') in response 
to comment. The Revised Methodology, entitled ``SBA's Size Standards 
Methodology (April 2019),'' is available for review/download on the SBA 
website at https://www.sba.gov/size-standards-methodology as well as on 
the Federal rulemaking portal at https://www.regulations.gov. SBA will 
apply the Revised Methodology in the ongoing, second five-year review 
of size standards as required by the Jobs Act.

    Dated: April 4, 2019.
Linda M. McMahon,
Administrator.
[FR Doc. 2019-07130 Filed 4-10-19; 8:45 am]
 BILLING CODE 8025-01-P