Small Business Administration changed its calculation period for employee-based size standards | Womble Bond Dickinson

Regulatory background for recent changes to SBA’s size standards

A business concern may self-certify as small for a federal government contract if it meets the applicable size standard associated with the NAICS Code assigned to that contract. NAICS codes and corresponding size standards are found in 13 CFR § 121.201. Each size standard is determined by: (1) the average number of employees employed by the concern, or (2) the average annual revenue of the concern.

On December 17, 2018, President Trump signed into law the Small Business Runway Extension Act of 2018 (Runway Extension Act), which extended the measurement period for calculating average annual income for small business size purposes from three years to five years. The Runway Expansion Act did not affect employee-based size standards. We addressed that change in previous alerts, which can be found here. The overall purpose of the Runway Extension Act was to allow businesses with growing revenues to have more time under the five-year calculation to remain small before being excluded from competition for SBA set-aside contracts.

While the Runway Expansion Act was signed into law on December 17, 2018, SBA did not implement the changes in its regulations until January 6, 2020 (84 Fed. Reg. 66561) and even then included a grace period that allows contractors to choose between a 3-year or 5-year period for average annual receipts through January 6, 2022. The option to choose a 3-year or 5-year period for average annual receipts ended on January 6, 2022, except for SBA Programs business loans and disaster loans. While the Final Rule extended this election option to additional SBA financial assistance programs (ie, Business Loans, Disaster Loans, SBG, and SBIC Programs), SBA confirmed that it will not renew or allow elections for contracting programs of government because government contracts involve competition and every competitor should be required to follow the same calculation time period when competing for a government contract. The regulations governing the calculation of average annual income can be found at 13 CFR § 121.104.

Consistent with the changes made to the annual bill calculation under the Runway Expansion Act, on January 1, 2021, Congress also directed changes to the employee-based size standards through language contained in section 863 of the National Defense Authorization Act. Fiscal Year 2021 (FY2021 NDAA). Specifically, through passage of the FY2021 NDAA, Congress directed SBA to change the 12-month calculation period for the average number of employees to 24 months. This extended time period for calculating size under an employee-based size standard will allow businesses to remain eligible for SBA programs for a longer period and will better reflect the true size of a concern .

Impact of SBA’s Final Rule on Changing Employee-Based Size Standards

Employee-based size standards apply primarily to manufacturers, but firms in some environmental remediation, insurance, mining, publishing, research and development, telecommunications, transportation, and utilities industries also size based on the number of employees. Therefore, the Final Rule will not affect all small business concerns, but it will change how size is calculated for firms that determine size based on the number of employees.

Unlike the phase-in changes that were made to annual bill calculations as a result of the Runway Extension Act, the Final Rule does not include any transition period for the 24-month employee calculation to take effect. Beginning July 6, 2022, concerns for determining their size based on the average number of employees must use the 24-month period.

However, similar to the intent of the Track Extension Act, the Final Rule will allow concerns that use employee-based size standards a longer track to determine eligibility for SBA programs. For example, a business that may have had a significant increase in hiring due to supply shortages that occurred last year will now have a 24-month period to size up, which will cause the increase in temporary employment to have less impact. Concerns that may have recently lost their eligibility based on the 12-month calculation due to significant increases in employment over the past year can now be recertified as a small business if the 24-month period brings them under the relevant size standard. SBA expects the Final Rule to result in a net gain of approximately $158 million in federal small business contract dollars as more firms will qualify for these contracts due to the longer period to calculate size.

Conclusion

Contractors using employee-based size standards should closely review the requirements of 13 CFR § 121.106, which now includes the 24-month calculation period, to determine how these changes affect their size.

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