SBA Finalizes Changes In How To Calculate Size For Various Programs

Morrison & Foerster LLP - Government Contracts Insights

Earlier this week, the U.S. Small Business Administration (SBA) issued a Final Rule adopting changes to how a concern calculates its number of employees for eligibility purposes in all of SBA’s programs, as well as how a concern calculates average annual receipts for SBA’s Business Loan, Disaster Loan, Small Business Investment Company (SBIC), and Surety Bond Guarantee (SBG) Programs.

Previously, SBA’s regulations required concerns, when calculating their size in terms of employees, to average the number of employees in each of their pay periods for the preceding completed 12 calendar months. Effective January 1, 2022, the 2021 National Defense Authorization Act (NDAA) changed the calculation period to an average over the previous 24 calendar months, but only for employee size standards associated with manufacturing North American Industry Classification System (NAICS) codes. SBA’s Final Rule, however, provides that the 24-month period shall be used for all employee-based size standards, not just those relating to manufacturing NAICS codes. This change will be effective July 6, 2022, with no transition period to allow concerns to choose between 12 or 24 months to ease into the new calculation. In other words, starting next month, concerns must calculate employee-based size using the average number of employees over the preceding 24 months. SBA explained that, given the drop in employees during COVID-19 pandemic, most concerns would see lower employee counts over the previous 24 months than the previous 12 months, anyway, and therefore, no transition period is necessary.

The Final Rule also changes the period for calculating average annual receipts for purposes of determining size associated with receipts-based size standards for eligibility in the Business Loan, Disaster Loan, Small Business Investment Company (SBIC), and SBG Programs. Currently, the Business Loan, Disaster Loan, and SBIC Programs require concerns to use an average over the previous three fiscal years, whereas, as of January 2022, the SBG Program required concerns to use an average over the previous five fiscal years. The Final Rule, however, provides that concerns may now use either a three or a five-year average for these programs. Many may recall that when SBA implemented the change to use a five-year average instead of three for eligibility purposes in the Government Contracting Program in January 2020, it allowed concerns to choose between three or five years until January 2022, at which time all concerns were required to use only the five-year average. SBA is not providing a similar transition for the Business Loan, Disaster Loan, SBIC, and SBG Programs, though. Instead, SBA intends to make the choice to use three or five years a permanent option for concerns in these programs. Thus, a difference in how to calculate size for receipts-based size standards between SBA’s Government Contracts Program and its other programs will remain.

Companies participating in any of these programs should be aware of this change, which will be effective in just a few short weeks, to ensure they are calculating their size correctly.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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