SBA Proposes to Increase Another 70 Size Standards for Service Industries

Pillsbury Winthrop Shaw Pittman LLP

The proposed rule would increase the receipts-based small business size standards for 70 service industries in five industrial sectors, allowing many businesses to qualify or re-qualify for small business set-aside acquisitions.

TAKEAWAYS

  • SBA proposes to increase the receipts-based size standards for another 70 service industries in the Education; Health Care and Social Assistance; Arts, Entertainment and Recreation; Accommodation and Food; and Other Services sectors.
  • Many of these proposed size standard increases are substantial, with increases averaging more than $3.5 million.
  • SBA proposes to retain the existing size standards for the remaining 75 industries in these five industrial sectors.

As we noted in our recent client alert, under the Small Business Jobs Act of 2010, the U.S. Small Business Administration (SBA) is required every five years to review the existing size standards and make necessary adjustments to reflect current industry and market conditions. This review is separate from the adjustment for inflation that the SBA is required to make to all receipt-based size standards, also every five years. Rather than review all of the more than 1,000 North American Industrial Classification System (NAICS) code standards at one time, the SBA spreads its effort over the 5-year period, evaluating several industry sectors at a time.

On November 27, 2020, the SBA announced the results of its review for another 145 industries. These 145 industries are contained in NAICS codes Sectors 61 - Education Services; 62 - Health Care and Social Assistance; 71 - Arts, Entertainment and Recreation; 72 - Accommodation and Food Services; and 81 - Other Services. Using Census Bureau information, the SBA ascertained that almost two million small businesses work in these five sectors. During FYs 2016-2018, more than 26,000 unique small businesses received at least one federal contract in these sectors. For the 145 NAICS codes in these five sectors, the SBA’s proposed rule would increase the receipts-based small business size standards for 70 NAICS codes and leave the remaining 75 size standards at the current level.

To evaluate current industry and market conditions, the SBA has developed a Size Standards Methodology to statistically assess industry differences and the overall degree of competitiveness of an industry. The SBA typically considers four primary factors, including: (1) average firm size; (2) degree of competition within an industry; (3) start-up costs and entry barriers; and (4) distribution of firms by size. The SBA also considers other factors, including current economic conditions, its mission and program objectives, the Administration’s current policies and impacts on small businesses under the current size and proposed size standards. The SBA did not propose any reductions to size standards because of the current economic conditions caused by the COVID-19 pandemic. The SBA also decided not to propose an increase to its maximum size standard of $41.5 million.

Using its Size Standards Methodology, the SBA proposed size standard increases of 50 percent or more for 15 of the 70 industries. The SBA also proposed increases of at least 20 percent for an additional 23 of the 70 industries. For these 70 industries, the average size standard increase was more than $3.5 million. The SBA proposed to increase the size standard for these 70 industries as follows.

These size standard adjustments will have significant impacts on the small businesses in these 70 industries. Many larger small businesses that have recently outgrown their applicable size standard may qualify again as small businesses under the increased size standards. Also, the size standard adjustments may enable many concerns to qualify as small businesses for longer periods under the increased size standards. With these proposed changes in mind, many small businesses may need to revise their strategic planning.

Comments on the proposed rule must be submitted to the SBA by January 26, 2021.

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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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