On June 6, the U.S. Small Business Administration (SBA) issued a final rule modifying its methodology for calculating the size of small businesses using an employee-based size standard and authorizes businesses participating in its Business Loan, Disaster Loan, Surety Bond, and Small Business Investment Company (SBIC) programs to choose whether to use a three-year or five-year receipts average when determining eligibility. The final rule becomes effective on July 6, 2022.
First, the rule, amending 13 C.F.R. § 121.106, increases the period for calculating employee-based size standards from 12 months to a 24-month trailing average basis and applies to all SBA small business and socioeconomic programs. The change implements Section 863 of the 2021 National Defense Authorization Act (NDAA), amending Section 3(a)(2)(C)(ii)(I) of the Small Business Act.
Notably, the rule will not provide a transition period where businesses can choose to calculate their size using the 12-month or 24-month period as the SBA allowed with the implementation of the Small Business Runway Extension Act of 2018 (SBREA). The SBA argues a transition period is unnecessary at this point in the economic recovery as employment is “returning to the pre-pandemic level.”
The SBA believes the rule will allow businesses “to better adjust to surges in employment in both the short and medium-term” and provide its programs to an increased number of recipients allowing the small business community and broader economy to better recover following the COVID-19 pandemic. In addition, “the SBA [expects] the 24-month employee average to be lower than the 12-month average for most businesses,” resulting in 435 businesses “extending or regaining” their status and about 158 million additional contract dollars awarded to small businesses.
Some commenters expressed concerns that the rule would direct more funding to mid-size and larger small businesses with the resources to outcompete smaller-sized small businesses. The SBA pushed back on the critics, arguing the 24-month averaging period is a better overall measure of business size and the new evaluation period provides an “expanded runway [for businesses] to grow and become competitive for federal opportunities.” Further, SBA predicts the enlarged pool of potential awardees will prompt the federal government to set aside more contracts for small businesses.
Second, the new rule changes the size calculation rules for businesses participating in SBA’s Business Loan, Disaster Loan, Surety Bond, and Small Business Investment Company (SBIC) programs. When SBA implemented SBREA, the agency changed its receipts-based size standards for everything except its business and disaster loan programs. The new rule extends those changes to the programs mentioned above, allowing businesses to elect whether to calculate their average annual receipts using a three-year or five-year average.
The SBA hopes the choice of average will result in a greater number of businesses eligible to benefit from agency programs. For instance, companies that have recently lost their eligibility may regain their status and growing businesses will most likely be able to continue benefiting from SBA programs.
Rules and regulations concerning eligibility for SBA programs are extensive and can be confusing. Misrepresenting size standards can result in a prohibition from competing on specific contracts, criminal investigations, and fines. The Department of Defense Office of Inspector General’s Defense Criminal Investigative Service has made investigating cases of false representations an agency priority. As we touched on in a previous blog post, upon obtaining credible evidence of infractions due to misrepresenting size standards, government contractors are required to disclose such violations in writing. It is crucial businesses comply with and understands relevant SBA rules before certifying as a small business.