August 19, 2019
Khem R. Sharma, Ph.D.
Chief, Office of Size Standards
U.S. Small Business Administration
409 Third Street, S.W.
Mail Code 6530
Washington, D.C. 20416
Ref: RIN 3245-AH16: Small Business Size Standards: Calculation of Annual Average Receipts
Dear Dr. Sharma:
On behalf of the Professional Services Council,[1] National Defense Industrial Association,[2] and the U.S. Chamber of Commerce,[3] we are pleased to submit the following comments on the proposed rule published in the Federal Register on June 24, 2019.[4]
The Small Business Runway Extension Act of 2018 (Public Law 115-324; enacted December 17, 2018) requires SBA to modify the time period for calculating annual average receipts that are used to prescribe size standards for certain sectors of small businesses from the current three years to five years. We appreciate the extensive supplemental information that SBA has included in the Federal Register notice, including the detailed quantitative data and SBA’s analyses of the impact of the proposed change on various industries.
We acknowledge that any revision to the SBA size standards covers eligibility for not only federal procurement but also for SBA lending, disaster assistance and management assistance programs. In addition, many other federal agencies use the SBA size standards for the determination of small business status for their programs. Our focus here is only on the application to federal procurement programs.
We recognize that any revision to the SBA size standards will impact each company differently, depending on where they are in their business lifecycle and the opportunities and challenges they face in the federal procurement marketplace. The change to the size standards also has implications for federal agencies in meeting their goals for small business awards and for “other than small” businesses who are contractually required to have plans for subcontracting with small business.
Below are our comments on the proposed rule.
Section 121.104: How does SBA calculate annual receipts?
The proposed rule would modify SBA’s 13 CFR Section 121.104(c) rule to change from 3 years to 5 years the lookback period for calculating small business status against the appropriate NAICS code. We acknowledge the statutory requirement and support the rule as an implementation of that statute. However, we urge that the SBA final rule provide for a reasonable transition period for implementation between publication of the final rule and the “effective date” of the rule, to allow government systems to be updated and to give the contractor community time to properly implement the size calculation change. Absent coverage in the rule, we will support legislative or other regulatory guidance to achieve that purpose.
In addition, the proposed rule would apply this change to all NAICS codes that are based on a revenue-based calculation, not just to those companies who are considered “services” as provided for in the statute. We support that application. We concur with SBA’s comment that separating service-industry firms would cause confusion and create greater compliance barriers for all companies in the receipts- based industries. It would also create challenges for federal buying activities and for those federal systems, such as SAM.gov, required to track those size standards. It would also create challenges for businesses who rely on the size status certification.
Effective Date
The proposed rule would apply the five-year size standard rules only after the SBA-determined effective date of a final rule. Until that effective date, according to SBA, SBA will continue to apply the three-year averaging period for calculating all receipts-based size standards. As SBA notes, for procurements, small business status is determined as of the date when a firm certifies its size as part of an initial offer that includes price. During this period, businesses should be allowed to use either the three-year or the five-year averaging period for size standards determination. We also strongly recommend that SBA addresses in the final rule the timing of the application of the revised size standard to a concern’s self- certification of size under a prime contractor’s small business subcontracting plan.
We recognize the controversy that exists, such as here, where a statute mandates a change and there is a time gap between the effective date of the statute and the effective date of the implementing regulations. Without commenting on the SBA’s extensive analysis of its responsibility and authority to establish certain size standards, we believe the approach in this proposed rule provides both predictability and uniformity in its application. However, as noted above, we strongly urge SBA to provide a reasonable transition period for implementation between publication of the final rule and the “effective date” of the rule.
Calculating Size in Connection with Acquisition or Sale of Division
SBA proposes to clarify how annual receipts should be calculated in connection with the acquisition or sale of a division of a company. The proposed rule provides that the annual receipts would not be adjusted where the concern sells or acquires a segregable division during the applicable period of measurement or before the date on which it self-certifies as “small.” As SBA acknowledges, this approach is different from how SBA otherwise treats the sale or acquisition of a subsidiary.
The supplemental information accompanying the rule asserts that the receipts of a specific division of a concern would remain with the parent company and thus no adjustment to the calculation is necessary or appropriate to a concern that acquires only that division. By contrast, SBA argues, in the case of the sale or acquisition of a subsidiary, the seller could subtract the annual receipts from its subsequent calculation and the acquiring concern would be required to add the annual receipts to its subsequent calculation.
While we see the value for firms in being able to exclude certain revenues from the calculation of annual receipts, our concern is not with the “form over substance” assumption SBA makes but rather with the difficulty of providing certainty and predictability in good faith size status calculations. We recommend that both circumstances be treated identically and that, in both cases, the revenue be excluded from the calculation during the first cycle of its calculation of annual average revenue.
Section 121.903: Effect on other agency size status calculations
The proposed rule would amend 13 CFR 121.903 to change the requirements for agencies that adopt size standards for their own programs instead of using SBA’s size standards. A receipts-based size standard of a non-SBA agency that would be applied to the services industry must include an averaging period of at least five years; the proposed rule does not change the averaging period for industries other than services. We understand that SBA’s approach is based on its strict interpretation of the Runway
Extension Act of 2018. However, just as SBA has taken the initiative to expand the averaging period for all industries under SBA’s size status, not just for the services industries as provided for in the Runway Extension Act of 2018, so too here we believe it should take the same approach for consistency and uniformity. Several associations are supporting legislation in the 116th Congress to clarify the application of the Runway Extension Act for this purpose.
Thank you for the opportunity to comment on this important proposed rule. If you have any questions or need any additional information, please contact Alan Chvotkin, Executive Vice President and Counsel of the Professional Services Council, who serves as our project manager for this case. He can be reached at (703) 875-8148 or atchvotkin@pscouncil.org.
Sincerely,
Professional Services Council
National Defense Industrial Association
U.S. Chamber of Commerce
[1] The Professional Services Council (PSC) is the voice of the government technology and professional services industry. PSC’s more than 400 member companies provide federal agencies with services of all kinds, including information technology, engineering, logistics, facilities management, operations and maintenance, consulting, international development, scientific, social, environmental services, and more.
[2] The National Defense Industrial Association (NDIA) represents more than 1,600 corporate and over 80,000 individual members from small, medium, and large contractors; our members and their employees feel the impact of any policy change made in how the United States equips and supports its warfighters.
[3] The U.S. Chamber is the world’s largest business federation, representing the interests of more than three million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.
[4] Available at: https://www.govinfo.gov/content/pkg/FR-2019-06-24/pdf/2019-12754.pdf.
