SBA Takes Flak Over Revising Company Size Standards

Rep. Sam Graves says SBA's proposed rule could prompt litigation. Rep. Sam Graves says SBA's proposed rule could prompt litigation. United States House Republican Conference

The Small Business Administration’s bid to modernize its classifications of companies eligible for contracts and loans has drawn venom from a powerful House committee chairman and some in the information technology industry.

A proposed rule to revise employee-based size standards is “arbitrary and capricious” and “irrational,” Rep. Sam Graves, R-Mo., chairman of the Small Business Committee, said in a Nov. 10 letter to SBA. The draft rule also “disregarded the express language” of the 2013 National Defense Authorization Act requiring SBA to publicly document its reasoning for changing classifications, added Graves, who warned of litigation and a legislative fix.

Critics worry that too many IT companies would be dealt out of SBA’s programs.

In September, the SBA published in the Federal Register a proposal to change national industry classifications, as part of its four-year-old review of size standards under the 2010 Small Business Jobs Act. The proposed process would base classification of companies more on annual revenues more than number of employees. The comment period ended Monday.

Together with other changes, the new rule would define as small businesses those IT firms with $27.5 million or less in annual sales, making nearly 1,650 more firms eligible for federal procurement and SBA’s loan programs, according to the agency.

Among other changes, the proposal would no longer allow some computer services firms with 150 employees or fewer to qualify for a separate sub-category for Information Technology Value Added Resellers.

“For size standards review, SBA takes into account the structural characteristics of individual industries, including average firm size, startup cost and entry barriers, the degree of competition, and small business share of federal government contracting dollars,” SBA said in the proposed rule. “This ensures that small business size definitions reflect current economic conditions and federal marketplace in those industries.”

The Petaluma, Calif.-based American Small Business League has long criticized SBA's methods, saying they allow large companies to masquerade as small businesses to win contracts.

“If the new SBA policy were adopted, small businesses that provide a wide range of information technology products would lose their small business status and be forced out of the federal marketplace,” said league founder Lloyd Chapman. “At the same time thousands of small businesses in the IT industry will be reclassified as large businesses, the SBA will continue to report billions of dollars in awards to Fortune 500 firms and their subsidiaries as small business contracts.”

The league estimates 12,000 companies would adversely affected by the proposed rule, and it plans to file an injunction.

Eliminating the exception for the resellers category “will take away the opportunity to compete for small business set-asides for hundreds of IT solution providers, effectively putting at risk and perhaps even wiping out an entire valuable small business sub-industry,” said an extended comment submitted by University of Baltimore law professor Charles Tiefer, whom the league retained to analyze the proposed rule. “The SBA does not give any market data or other persuasive reason for the elimination,” he wrote, adding that the result is precisely the opposite of what Congress intended. “With only the smaller IT-VAR businesses able to compete for small business contracts, larger federal contract requirements will no longer be set aside for small businesses.”

A spokeswoman referred Government Executive to a white paper explaining its methodology for the project. The spokeswoman said the agency recently launched its new online course Small Business Primer: Understanding Small Business Size Standards and Affiliation, and will supplement it with a blog.

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