On September 10, 2014, the U.S. Small Business Administration (“SBA”) issued two proposed rules to increase employee-based size standards for manufacturing and various other industries in connection with the agency’s ongoing review of existing size standards.  The SBA has the discretion to establish size standards as a threshold under which firms are eligible to participate in small business programs, including contract set-asides.  The SBA analyzes the characteristics of specific industries, such as average firm size and the small business share of revenue from federal contracts, to determine which size standard is most appropriate for a particular industry.  Based on an application of this analysis to recent data, the SBA is proposing to increase size standards for 239 industries, which would enable approximately 1,630 new firms to participate in small business programs.  In addition, the SBA is proposing to establish a new 1,250 employee size standard, allowing for a more precise classification of larger small businesses, and to remove or modify a number of unique size standards applicable to specific sub-industries.

The proposed rules are the products of a statutory mandate in 2010 requiring the SBA to review all size standards by 2015, after which the SBA must periodically review size standards every five years.  The last comprehensive review of existing employee-based size standards took place in the late 1970s and early 1980s.  Since that time, the vast majority of employee-based size standards have not been subject to review.  As the SBA itself recognizes, existing employee-based size standards are “no longer supportable” when compared to economic realities in a number of industries.

Although principally intended to update existing size standards, the proposed rules also implement the current congressional and executive policy of encouraging economic growth and creating jobs.  Recognizing that decreasing employee-based size standards would directly result in the loss of jobs, the SBA is proposing—with three exceptions to address firms that are dominant in their industries—only to maintain or increase existing size standards even though the SBA’s analysis of recent data indicates that decreasing size standards in twenty-six industries would otherwise be justified.  The SBA is also proposing to retain the current 500 employee minimum and 1,500 employee maximum size standards applicable to procurement programs, contrary to the SBA’s previous proposal to reduce the respective minimum and maximum size standards respectively to 250 and 1,000 employees.  The SBA is soliciting comments on whether its decision not to decrease size standards is warranted given current economic conditions.

In addition to updating existing size standards to address economic realities, the proposed rules correct inconsistencies in existing size standards.  The SBA is proposing, for example, to eliminate the unique size standard applicable to the Information Technology Value Added Resellers.  The SBA established this standard in 2003 to better address the economic characteristics of companies that provide the federal government with computer hardware or software in addition to substantial services.  However, the application of this standard has led to inconsistent results in the procurement process because contracting officers have the discretion to classify procurements under related industries, allowing for the application of a different size standard based solely on a contracting officer’s decision.  In addition, limitations on subcontracting in the Information Technology Value Added Resellers sub-industry are unclear because contracts in the sub-industry arguably can be classified as either contracts for services or supplies, which dictates the method by which limitations on subcontracting are to be applied.  The SBA proposes to resolve these issues by eliminating the unique size standard applicable to the sub-industry.

The SBA’s ongoing review and adjustment of its size standards could well impact the competitive landscape in certain areas of government contracting.  Small and large contractors alike should consider how these proposed changes are likely to impact their prime and subcontract opportunities, including their teaming arrangements.  Comments on the proposed rules are due on or before November 10, 2014.