[Federal Register Volume 89, Number 177 (Thursday, September 12, 2024)]
[Rules and Regulations]
[Pages 74109-74131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-20228]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121


Small Business Size Standards: Revised Size Standards Methodology

AGENCY: U.S. Small Business Administration.

ACTION: Notice of availability of white paper on revised size standards 
methodology.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) advises 
the public that it has revised its size standards methodology white 
paper, entitled ``SBA's Size Standards Methodology (June 2024)'' (the 
Revised Methodology or Methodology), explaining how it establishes, 
reviews, or revises small business size standards. SBA will apply the 
Revised Methodology to the forthcoming third five-year review of size 
standards required by the Small Business Jobs Act of 2010. On December 
11, 2023, SBA published a notification seeking comments on proposed 
revisions to its Methodology. This notification describes major changes 
to the Methodology and their impacts on size standards, followed by a 
discussion of the comments SBA received on the proposed revisions to 
the Methodology and Agency's responses.

DATES: September 12, 2024.

ADDRESSES: The 2024 Revised Methodology is available on the SBA's 
website at www.sba.gov/size.

FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Chief, Office of Size 
Standards, (202) 205-7189, or <a href="/cdn-cgi/l/email-protection#34475d4e514740555a5055465047744756551a535b42"><span class="__cf_email__" data-cfemail="a4d7cddec1d7d0c5cac0c5d6c0d7e4d7c6c58ac3cbd2">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION: 

A. Background

    To determine eligibility for Federal small business assistance 
programs, SBA establishes small business size definitions (commonly 
referred to as ``size standards'') for private sector industries in the 
United States. Under the Small Business Act (the Act), 15 U.S.C. 632(a) 
(Pub. L. 85-536, 67 Stat. 232, as amended), the SBA's Administrator 
(Administrator) has authority to establish size standards for Federal 
Government programs. SBA's existing size standards use two primary 
measures of business size: average annual receipts and average number 
of employees. Financial assets and refining capacity are used as size 
measures for a few specialized industries. In addition, the SBA's Small 
Business Investment Company (SBIC), 7(a), and Certified Development 
Company (CDC/504) Programs determine small business eligibility using 
either the industry-based size standards or tangible net worth and net 
income based alternative size standards. Presently, there are 102 
different size standards, covering 978 industries and 14 subindustries, 
also known as ``exceptions.'' Of these, 505 are based on average annual 
receipts, 483 on number of employees (one of which also includes 
barrels per calendar day total refining capacity), and four on average 
assets.
    The Small Business Jobs Act 2010 (Pub. L. 111-240, 124 Stat. 2504, 
Sept. 27, 2010) requires SBA to review, every five years, all size 
standards and make necessary adjustments to reflect market conditions. 
SBA completed the first five-year review of size standards under the 
Jobs Act in early 2016 \1\ and completed the second five-year review of 
size standards in early 2023.\2\ SBA will begin the next (third) five-
year review of size standards in the near future.
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    \1\ See Report on the First Five-Year Comprehensive Review of 
Size Standards at https://www.sba.gov/sites/sbagov/files/2023-09/Report%20on%20the%20First%205-Year%20Comprehensive%20Size%20Standards%20Review-508F.pdf.
    \2\ See Report on the Second Five-Year Comprehensive Review of 
Size Standards at https://www.sba.gov/sites/sbagov/files/2023-07/SBA%27s%20Report%20on%20the%20Second%205%20Year%20Review%20of%20Size%20Standards_Final.pdf.
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    The goal of SBA's size standards review is to determine whether its 
existing size standards reflect the current industry structure and 
Federal market conditions and revise them if the latest available data 
suggests that revisions are warranted. The Act requires that the size 
standard varies from industry to industry to the extent necessary to 
reflect the differing characteristics of the various industries. SBA 
evaluates the structure of each industry in terms of four economic 
characteristics or factors, namely average firm size, average assets 
size as a proxy of startup costs and entry barriers, the four-firm 
concentration ratio as a measure of industry competition, and size 
distribution of firms using the Gini coefficient (13 CFR 121.102(a)). 
Besides industry structure, SBA also examines the impact of an existing 
size standard as well as the potential impact of a revised size 
standard on small business participation in Federal contracting as an 
additional primary factor when establishing, reviewing, or modifying 
the size standards. SBA generally considers these five factors--average 
firm size, average assets size, four-firm concentration ratio, Gini 
coefficient, and small business participation in Federal

[[Page 74110]]

contracting--to be the most important factors in determining an 
industry's size standard. The 2024 Revised Size Standards Methodology 
White Paper provides a detailed description of evaluation of these 
factors (including relevant data sources) and derivation of size 
standards based on the results.
    SBA also periodically adjusts all monetary based standards for 
inflation. In accordance with SBA's regulations (13CFR 121.102(c)) and 
rulemaking (67 FR 3041; January 23, 2002), an adjustment to size 
standards for inflation is made at least once every five years. In 
response to higher than normal rates of inflation, some past inflation 
adjustments have been made on more frequent intervals. For example, in 
response to ongoing higher than normal inflation, SBA issued an out-of-
cycle inflation adjustment to monetary based size standards on November 
17, 2022 (87 FR 69118). The SBA's Methodology also explains how it 
adjusts monetary based size standards for inflation. SBA also updates 
its size standards, every five years, to adopt the Office of Management 
and Budget's (OMB) quinquennial North American Industry Classification 
System (NAICS) revisions to its table of small business size standards. 
Effective October 1, 2022, SBA adopted the OMB's 2022 NAICS revisions 
(86 FR 72277; December 21, 2021) for its table of small business size 
standards (87 FR 59240; September 29, 2022). The Methodology also 
explains the SBA's procedures for adopting updated NAICS definitions 
for the table of size standards.
    Section 3(a) of the Act provides the Administrator with authority 
to establish small business size standards for Federal Government 
programs. The Administrator has discretion to determine precisely how 
SBA should establish small business size standards. The Act and its 
legislative history highlight three important considerations for 
establishing size standards. First, as stated earlier, size standards 
should vary from industry to industry according to differences among 
industries. 15 U.S.C. 632(a)(3). Second, a firm that qualifies as small 
under the SBA's size standard shall not be dominant in its field of 
operation. 15 U.S.C. 632(a)(1). Third, pursuant to 15 U.S.C. 631(a), 
the policies of the Agency should assist small businesses as a means of 
encouraging and strengthening their competitiveness in the economy. 
These three considerations continue to form the basis for the SBA's 
methodology for establishing, reviewing, or revising small business 
size standards.
    The 2024 Revised Methodology, available on the SBA's website at 
www.sba.gov/size, describes in detail how SBA establishes, evaluates, 
and adjusts its small business size standards pursuant to the Act and 
related legislative guidelines.\3\ Specifically, the document provides 
a brief review of the legal authority and early legislative and 
regulatory history of small business size standards, followed by a 
detailed description of the size standards analysis. Below, SBA 
provides a brief summary of the revisions to SBA's Methodology, which 
are described in greater detail in the 2024 Revised Methodology.
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    \3\ Prior to finalizing the 2024 Methodology for establishing, 
reviewing, modifying size standards, SBA issued a notification in 
the December 11, 2023, issue of the Federal Register (88 FR 85852) 
to solicit comments from the public and notify stakeholders of the 
proposed changes to the Methodology. As discussed under the 
``Discussion of Comments'' section of this notification, SBA 
considered all public comments in finalizing the 2024 Methodology.
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B. Revisions to SBA's Size Standards Methodology

    SBA's 2024 Revised Methodology describes various changes and 
revisions to the 2019 Methodology and provides a detailed history of 
changes to SBA's Methodology for evaluating size standards over the 
years. In the past, including the first five-year review of size 
standards under the Jobs Act, to determine an overall size standard for 
each industry, SBA compared the characteristics of each industry with 
the average characteristics of a group of industries associated with an 
``anchor'' size standard. For example, in the first five-year review of 
size standards, $7 million (now $9 million due to the inflation 
adjustments in 2014, 2019, and 2022) was considered the ``anchor'' for 
receipts-based size standards and 500 employees was considered the 
``anchor'' for employee-based size standards. If the characteristics of 
a specific industry under review were similar to the average 
characteristics of industries in the anchor group, SBA generally 
adopted the anchor size standard for that industry. If the specific 
industry's characteristics were significantly higher or lower than 
those for the anchor group, SBA assigned a size standard that was 
higher or lower than the anchor.
    In response to public comments received during the first five-year 
review of size standards concerning SBA's size standards methodology, 
section 3(a)(7) of the Act (which limits the SBA's ability to create 
common size standards by grouping related industries below the four-
digit NAICS level), and its own review of the Methodology, in the 2019 
Methodology, SBA replaced the ``anchor'' approach with the 
``percentile'' approach, as the basis of evaluating industry factors 
(i.e., average firm size, average assets, the four-firm concentration 
ratio, and the Gini coefficient) and deriving a size standard for each 
industry factor for each industry.\4\ Under the ``percentile'' 
approach, for each factor, an industry is ranked and compared with the 
20th percentile and 80th percentile values of that factor among the 
industries sharing the same measure of size standards (i.e., receipts 
or employees). Combining that result with the 20th percentile and 80th 
percentile values of size standards among the industries with the same 
measure of size standards, SBA computes a size standard supported by 
each industry factor for each industry, then computes a weighted 
average of the resulting supported size standards to obtain an overall 
size standard for each industry.
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    \4\ For a detailed justification for replacement of the 
``anchor'' approach to size standards analysis with the 
``percentile'' approach and a detailed description of the percentile 
approach, see the SBA's 2019 Size Standards Methodology White Paper, 
available on SBA's website at https://www.sba.gov/sites/default/files/2023-12/SBA%20Size%20Standards%20Methodology%20April%2011%2C%202019-508.pdf.
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    In the 2024 Revised Methodology, SBA is maintaining the 
``percentile'' approach as a basis of evaluating industry factors and 
deriving size standards for each industry factor for each industry; 
however, based on its review of the current methodology, SBA is 
adopting two major changes to its size standards methodology.
    The first major change is to replace the current approach used to 
account for the Federal contracting factor with the disparity ratio 
approach. Under the 2019 Methodology, SBA defined the Federal 
contracting factor for each industry averaging $20 million or more in 
Federal contracts annually as the difference between the small business 
share of total contract obligations and the small business share of 
industry' receipts. If the small business share of an industry total 
receipts exceeds the small business share of total contract obligations 
by ten percentage points or more, all else being the same, SBA would 
increase that industry's current size standard by a certain amount 
depending on the amount of that difference. If that difference is less 
than ten percentage points, SBA considers that the current size 
standard is sufficient with respect to the Federal contracting factor.
    Under the disparity ratio approach, SBA computes a disparity ratio 
as a

[[Page 74111]]

ratio (instead of the difference) between the small business share of 
contract obligations (utilization ratio) and the small business share 
of industry receipts (availability ratio). SBA also computes a second 
disparity ratio as a ratio between small business share of the number 
of contracts (utilization ratio) and the share of small firms in the 
total population of firms that are willing, ready, and able to bid on 
and perform Federal contracts (availability ratio).
    If an industry's disparity ratio is less than 0.8, SBA would assume 
that small businesses are either materially underrepresented (i.e., the 
disparity ratio is 0.5 or greater and less than 0.8) or substantially 
underrepresented (i.e., the disparity ratio is less than 0.5) in the 
Federal market under that industry's current size standard and would 
generally propose to increase the current size standard. If an 
industry's disparity ratio is 0.8 or higher, small businesses are 
considered overrepresented (i.e., the disparity ratio is 0.8 or higher 
and less than 1.2) or substantially overrepresented (i.e., the 
disparity ratio is 1.2 or higher) in the Federal market in that 
industry under the current size standard, and the size standard is 
maintained at the current level.
    The second proposed major change is to replace the 20th percentile 
and 80th percentile values of industry factors for evaluating size 
standards at subindustry levels (``exceptions'') currently calculated 
based on the Economic Census data with those calculated using the 
Federal Procurement Data System--Next Generation (FPDS-NG) and the 
System for Award Management (SAM) data.
    SBA is adopting these changes in order to refine and improve its 
analysis of Federal contracting data used in the evaluation of industry 
size standards. These changes are also in response to public comments 
received during the second five-year review of size standards that 
pertained to Federal contracting trends generally. Although SBA did not 
specifically seek comments to the 2019 Methodology as part of the 
series of proposed rules issued to review size standards under the 
second five year review,\5\ SBA notes that a number of commenters to 
SBA's proposed rules expressed positions both for and against SBA's 
proposed size standards based on Federal contracting trends, data, or 
analysis.\6\ Thus, given the demonstrated relevance of Federal 
contracting trends to small businesses, SBA believes that it is 
important to continually review and adjust its methodology for 
evaluating Federal contracting data to ensure its analysis accurately 
captures the varying impact of Federal contracting trends by industry.
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    \5\ See Small Business Size Standards: Agriculture, Forestry, 
Fishing and Hunting; Mining, Quarrying, and Oil and Gas Extraction; 
Utilities; Construction (85 FR 62239; October 2, 2020), Small 
Business Size Standards: Transportation and Warehousing; 
Information; Finance and Insurance; Real Estate and Rental and 
Leasing (85 FR 62372; October 2, 2020), Small Business Size 
Standards: Professional, Scientific and Technical Services; 
Management of Companies and Enterprises; Administrative and Support 
and Waste Management and Remediation Services (85 FR 72584; November 
13, 2020), Small Business Size Standards: Education Services; Health 
Care and Social Assistance; Arts, Entertainment and Recreation; 
Accommodation and Food Services; Other Services (85 FR 76390; 
November 27, 2020), and Small Business Size Standards: Wholesale 
Trade and Retail Trade (86 FR 28012; May 25, 2021), Small Business 
Size Standards: Manufacturing and Industries With Employee-Based 
Size Standards in Other Sectors Except Wholesale Trade and Retail 
Trade (87 FR 24752; April 26, 2022). Comments available at 
www.regulations.gov.
    \6\ Prior to finalizing the 2019 Methodology for revising size 
standards under the second five-year review, SBA issued a 
notification in the April 27, 2018, issue of the Federal Register 
(83 FR 18468) to solicit comments from the public and notify 
stakeholders of the proposed changes to the 2019 Methodology. SBA 
considered all public comments in finalizing the 2019 Methodology. 
For a summary of comments and SBA's responses, refer to the SBA's 
April 11, 2019, Federal Register notification (84 FR 14587).
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    To determine how the above changes in the Methodology would affect 
size standards across various industries and sectors, SBA derived the 
new size standards for all industries averaging $20 million or more in 
Federal contract dollars annually (excluding Sectors 42 and 44-45) 
using the 2019 Methodology and the disparity ratio approach of defining 
the Federal contracting factor under the 2024 Methodology. Overall, the 
calculated size standards were quite similar between the two approaches 
when compared to the existing size standards, with size standards 
increasing for some industries and decreasing for others under both 
approaches.
    SBA believes that using FPDS-NG and SAM data to obtain the 20th 
percentile and 80th percentile values of industry factors for 
evaluating size standards for the exceptions, instead of using the 
percentiles from the Economic Census, will promote consistency in its 
analysis of the exceptions by ensuring that the percentile values and 
factor values for each exception are in comparable terms. Specifically, 
SBA has found that for most industries, the average firm size of 
businesses participating in Federal contracting is generally larger 
than the average firm size of businesses represented in the Economic 
Census. There are also inconsistencies in data reporting between SAM/
FPDS-NG data and the Economic Census, which SBA will address by 
adopting the revised approach. Thus, SBA believes that using FPDS-NG 
and SAM to obtain the percentile values of industry factors for the 
exceptions will better reflect the varying economic characteristics of 
the underlying industries. The full results of SBA's impact analysis as 
well as a detailed description of the major changes to SBA's evaluation 
of size standards are included in the 2024 Revised Methodology.
    In the 2024 Revised Methodology, SBA is also updating the minimum 
and maximum size standard levels based on current minimum and maximum 
size standard levels. The minimum size standard generally reflects the 
size a small business should be to have adequate capabilities and 
resources to be able to compete for and perform Federal contracts. On 
the other hand, the maximum size standard represents the level above 
which businesses, if qualified as small, would cause significant 
competitive disadvantage to smaller small businesses when accessing 
Federal assistance. SBA will not generally propose or adopt a size 
standard that is either below the minimum or above the maximum level, 
even though the calculations might yield values below the minimum or 
above the maximum level.
    With respect to receipts-based size standards, SBA is adopting $8 
million and $47 million, respectively, as the minimum and maximum size 
standard levels (except for most agricultural industries in Subsectors 
111 and 112). These levels reflect the current minimum and the current 
maximum of receipts-based size standards. As in the 2019 Methodology, 
the latest industry data from the 2017 Census of Agriculture suggests 
that $8 million minimum and $47 million maximum size standard levels 
would be too high for agricultural industries in Subsector 111 and 
Subsector 112. Accordingly, SBA is adopting $2.25 million and $5.5 
million, respectively, as the minimum and maximum size standard levels 
for agricultural industries in Subsectors 111 and 112 (excluding NAICS 
112112 and NAICS 112310). These levels represent the current minimum 
and current maximum levels of size standards in Subsectors 111 and 112 
(excluding NAICS 112112 and NAICS 112310).\7\
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    \7\ NAICS 112112 (Cattle Feedlots) and NAICS 112310 (Chicken Egg 
Production) currently have a size standard of $22 million and $19 
million, respectively, and will be subjected to the $8 million 
minimum and $47 million maximum size standards proposed for other 
industries with receipts-based size standards.

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[[Page 74112]]

    Regarding employee-based size standards for manufacturing and other 
industries that have employee-based size standards (excluding Wholesale 
and Retail Trade), SBA's 250-employee minimum and 1,500-employee 
maximum are the current minimum and maximum employee based size 
standards among those industries. For employee-based size standards for 
Wholesale Trade and Retail Trade industries, the minimum and maximum 
size standards levels are 50 employees and 250 employees, 
respectively.\8\
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    \8\ Current employee-based size standards for the wholesale and 
retail trade industries range from 100 employees to 250 employees. 
However, as in the 2019 Methodology, SBA is proposing a lower 50-
employee level as the minimum employee-based size standard to 
account for differences among industries more accurately.
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    SBA is also updating the percentile values, derived from the latest 
2017 Economic Census and other industry data, used to evaluate the 
structure of each industry in terms of the four economic 
characteristics or factors, namely average firm size, average assets 
size, the four-firm concentration ratio, and the Gini coefficient. As 
explained in the 2024 Revised Methodology, SBA ranks industries by size 
standard types in terms of the four industry factors and in terms of 
the existing size standards, then computes the 20th percentile and 80th 
percentile values for both. SBA then evaluates each industry by 
comparing its value for each industry factor to the 20th percentile and 
80th percentile values for the corresponding factor for industries 
under a particular type of size standard. The updated 20th percentile 
and 80th percentile values for the four factors for receipts-based and 
employee-based size standards are found in Table 5 and Table 6 of the 
2024 Revised Methodology, respectively; the updated 20th percentile and 
80th percentile values of size standards are found in Table 7.

C. Discussion of Comments

    On December 11, 2023, SBA published a notification in the Federal 
Register seeking comments on the above changes to its size standards 
methodology and a number of policy issues or questions it faces 
regarding the size standards methodology (88 FR 85852). Pursuant to 
section 1344 of the Jobs Act, on June 23 and 25, 2023, SBA also held 
two public forums on size standards to update the public on the status 
of the quinquennial reviews of size standards under the Jobs Act and 
seek public feedback on proposed revisions to the size standards 
methodology.
    SBA received a total of 21 comments (including one received during 
the public forums on size standards), of which 19 were significant. Of 
these 19 comments, two represented SBA's administrative records of two 
public forums designed to update the public on the status of 
quinquennial reviews of size standards under the Jobs Act and seek 
feedback on SBA's Revised Methodology, which will be used to review and 
adjust size standards under the forthcoming third five-year review of 
size standards. Public comments are summarized below and are available 
on the Federal Government e-rulemaking portal at www.regulations.gov.

1. General Support/Comment

    SBA received four comments that expressed full support for its 
Revised Methodology. One commenter found the Revised Methodology to be 
a reasonable and consistent approach to establish, review, and modify 
size standards. The commenter appreciated the SBA efforts to 
incorporate the recent amendments to the Small Business Act and to 
address the public comments to the 2019 Methodology. Specifically, the 
commenter commended the SBA for making certain analytical improvements, 
such as adopting a percentile approach, assigning a separate size 
standard for each NAICS industry, lowering the threshold for the 
Federal contracting factor, and applying the 4-firm concentration ratio 
to all industries. The commenter believed that these changes would 
better reflect the current market conditions and ensure that the size 
standards are in accordance with the legislative guidelines. Overall, 
the commenter supported the Revised Methodology, and urged SBA to 
finalize and publish it as soon as possible. The commenter stated that 
the Revised Methodology will provide a fair and consistent definition 
of a small business and will enable SBA to fulfill its mission of 
assisting and promoting the small business community.
    Another commenter, a service-disabled veteran-owned small business 
(SDVOSB), extended its full support for the SBA's proposed revisions to 
the Methodology. The commenter believed that proposed revisions are a 
significant step toward creating a more equitable, competitive, and 
dynamic small business landscape. SBA received two comments that also 
supported SBA's proposed revisions to the Methodology but did not 
provide any reasons for their support.
    A women-owned small business advocacy group submitted a comment to 
the SBA Revised Methodology. The commenter neither opposed nor 
supported the proposed revisions to the Methodology. Similarly, an 
industry association circulated the Revised Methodology to its 400-plus 
members and solicited their feedback. The members' input neither 
supported nor opposed the overall Methodology but agreed with the SBA 
position on a number of policy issues and questions regarding the 
Methodology.
SBA Response
    In absence of significant adverse comments against the Revised 
Methodology generally, SBA is adopting it as published for comments 
even though a couple of comments, as discussed below, objected using 
the FPDS-NG and SAM data to compute the 20th percentile and 80th 
percentile values of industry factors to evaluate the size standards at 
the subindustry levels, usually known as ``exceptions.'' One comment, 
also discussed below, opposed using the maximum size standards caps in 
calculating new size standards for each industry factor as well as in 
calculating the overall size standard for the industry. SBA did not 
receive any comment that objected to the adoption of the disparity 
ratio approach to account for small business participation in the 
Federal market.

2. Comments on Specific Issues/Questions Pertaining to the Methodology

    SBA sought feedback on a number of specific policy issues and 
questions it faces regarding the Methodology for establishing, 
reviewing, and modifying size standards. A number of commenters 
specifically addressed these issues, as discussed below.
    Should SBA establish size standards that are higher than industry's 
entry-level business size?
    Three commenters addressed this issue. A commenter concurred with 
the SBA's position that size standards must be established above the 
entry-level size to ensure small businesses have the necessary 
resources and capabilities to be able to perform and meet Federal 
Government contracting requirements. Another commenter supported the 
SBA's approach to establishing size standards that reflect the current 
realities of industry-specific dynamics, including setting standards 
above entry-level business sizes. This approach ensures that businesses 
with a footprint slightly above the ``entry level'' can still access 
vital resources and opportunities, fostering growth and innovation 
within their respective fields, the commenter added. SBA received 
another comment

[[Page 74113]]

from an industry association saying that SBA should continue using the 
size standards that are higher than the industry's entry-level business 
size. The commenter agreed with the SBA's position that establishing 
size standards at the industry entry-level firm size would cause small 
businesses to outgrow their eligibility very quickly, thereby lacking 
sufficient experience to succeed outside the small business market. 
More importantly, such size standards would likely lead to the 
undesirable outcome of fewer companies competing for Federal contracts, 
the commenter noted.
SBA Response
    In the absence of adverse comments against establishing the size 
standard above the entry-level business size, SBA adopts its approach 
of setting size standards higher than the entry-level business size to 
enable small businesses to compete against others of their size and 
considerably larger businesses for Federal contracts set-aside for 
small businesses. It is important that small businesses can apply for 
and be eligible for the various SBA's contracting and business 
development programs that have additional requirements, such as a 
minimum number of years in business to qualify for its 8(a) Business 
Development Program. This precludes setting size standards at too low a 
level or at the entry-level size. Additionally, establishing size 
standards at the industry entry-level firm size would cause small 
businesses to outgrow their eligibility very quickly, thereby lacking 
sufficient cushion or experience to succeed outside of the small 
business market. Finally, size standards must be above the entry-level 
size to ensure that small businesses have necessary resources and 
capabilities to be able to bid on and perform Federal contracts.
    Should there be a ceiling beyond which a business concern cannot be 
considered as small? In other words, should there be a maximum size 
standard?
    SBA received three comments addressing this issue, with two 
supporting and one opposing the SBA's position. One commenter supported 
the introduction of a maximum size standard because it is beneficial 
for maintaining the integrity of small business programs. The commenter 
asserted that establishing a maximum size standard cap ensures that 
Federal small business programs remain accessible to businesses that 
genuinely need them while preventing larger entities from overshadowing 
the competitive landscape for true small businesses, including SDVOSBs. 
A maximum size standard would serve as a safeguard, ensuring that the 
small business benefit is preserved for those it is intended to 
support, the commenter added.
    SBA received a comment from an industry association supporting the 
SBA's policy to continue maintaining the minimum and maximum levels for 
both receipts- and employee-based size standards. The commenter agreed 
with the SBA's position that, without the maximum caps as defined by 
the Revised Methodology, the calculated size standards would be 
extremely large for some industries, allowing very successful 
businesses with hundreds of millions in receipts or tens of thousands 
of employees to qualify as small for Federal assistance intended for 
small businesses.
    SBA received a comment disagreeing with SBA's proposed maximum caps 
of $47 million for revenue-based size standards and 1,500 employees for 
employee-based size standards. The commenter explained that size 
standards would better reflect the economic characteristics of 
industries if there were no caps on size standards and instead SBA 
permitted its industry-specific analysis of the data to determine the 
appropriate size standard for the industry. If SBA feels caps are 
necessary, the commenter urged SBA to provide a sound economic analysis 
to justify the application of caps. The caps result in lower size 
standards than would otherwise be calculated, and the Methodology no 
longer aspires to find a true economically appropriate size standard, 
the commenter argued. The commenter asserted that arbitrary caps are 
inconsistent with the requirement that size standards vary from 
industry to industry according to differences among industries and 
SBA's polices of encouraging and strengthening competition in the 
economy. Because of the introduction of caps, SBA runs the risk of 
being perceived to favor the smallest small businesses at the expense 
of the larger small businesses, the commenter noted. The commenter 
urged SBA to let the data drive the results instead of policies.
SBA Response
    SBA agrees with the industry association that, without the maximum 
caps, the calculated size standards would be extremely high, allowing, 
in some cases, extremely large companies with billions of dollars in 
revenues and tens of thousands of employees to qualify as small 
business. Capping calculated size standards at certain minimum and 
maximum levels is crucial for fulfilling the SBA's mission to serve and 
protect the interests of American small businesses and ensuring that 
Federal small business assistance goes to small businesses most in need 
of such assistance. For this reason, in the Revised Methodology, SBA 
retains its policy of capping the calculated receipts-based size 
standards at $47 million and calculated employee-based size standards 
at 1,500 employees. SBA has maintained its employee-based maximum size 
standard cap at the 1,500 employees despite the increased automation 
and resultant labor productivity growth. However, the receipts-based 
size standards have gradually increased over time due to inflationary 
adjustments, and the highest receipts-based size standard stands at $47 
million today.
    Should SBA consider adjusting employee-based size standards for 
labor productivity growth or increased automation?
    Four comments addressed this issue. SBA received a comment 
justifying the lack of SBA's adjustment to employee-based size 
standards for labor productivity growth and technical changes because 
it is difficult to measure and compare the productivity and technology 
levels across industries and over time.
    Another comment argued that, without seeing a specific proposal, it 
is difficult to comment on whether SBA should consider adjusting 
employee-based size standards for labor productivity growth or 
increased automation. However, the commenter recommended proceeding 
cautiously, as small businesses might not have the necessary capital to 
take advantage of automation and robotics.
    Another commenter argued that the rapid pace of technological 
advancement and its impact on labor productivity and automation 
necessitates adjustments to employee-based size standards and suggested 
that SBA incorporate considerations for labor productivity growth and 
automation into its Methodology. This adjustment would ensure that size 
standards remain relevant and that businesses utilizing technology to 
enhance productivity or automate processes are not unfairly classified 
as small due to efficiency gains, the commenter added.
    SBA received a comment supporting the SBA's current approach of not 
adjusting employee-based size standards for labor productivity growth. 
By updating size standards every five years, those factors are already 
captured in SBA's analysis of the industry structure, the commenter 
added. The commenter argued that any separate adjustments

[[Page 74114]]

would simply double count the impact of the productivity changes that 
are already reflected in the industry data.
SBA Response
    Of the four comments addressing this issue, three supported the 
SBA's current approach of not adjusting employee-based size standards 
for increased automation and labor productivity growth, even though the 
Agency adjusts monetary-based size standards for inflation. Just as 
firms in industries with monetary-based size standards may lose small 
business eligibility due to inflation, firms in industries with 
employee-based standards may gain eligibility due to improvement in 
labor productivity and technical change. There are three reasons for 
SBA for not adjusting employee-based size standards for productivity 
growth and technical change. First, there does not exist robust labor 
productivity growth data by 6-digit NAICS industry. Second, SBA agrees 
with one of the commenters supporting no labor productivity adjustment 
of employee-based size standards that the impact of changes in labor 
productivity are already reflected in the quinquennial Economic Census 
data that SBA uses to evaluate industry structure. Third, just as an 
adjustment to monetary-based size standards for inflation leads to 
increases in size standards, thereby allowing businesses to gain or 
maintain their small business status, an adjustment to employee-based 
size standards for labor productivity growth would lead to decreases in 
size standards, thereby causing currently small businesses to lose 
their small business status and eligibility for Federal small business 
assistance, which may run counter to the SBA's policy of not lowering 
size standards under distressed economic environment. For these 
reasons, in the Revised Methodology, SBA maintains its policy of not 
adjusting employee-based size standards for labor productivity growth.
    Should SBA consider lowering its size standards generally?
    Four comments addressed this issue. One commenter opposed lowering 
size standards arguing that many businesses have made investments based 
upon their ability to access small business set-aside markets and 
lowering size standards would unfairly penalize them.
    Citing the ongoing decline in the number of small businesses 
participating in the Federal marketplace, one commenter opposed 
lowering size standards. The commenter argued that lowering size 
standards will not only exacerbate this situation but also harms small 
businesses and deprives agencies of increased competition and the 
experienced small business vendor base. Instead of lowering size 
standards, the commenter added, SBA should look into raising size 
standards, thereby allowing more small businesses to remain in the 
Federal market longer. The commenter asserted that raising size 
standards would both expand the small business industrial base for 
Federal agencies and extend the runway for these firms as they grow and 
have a chance to successfully graduate from their status as small 
businesses. The commenter maintained that, by lowering size standards, 
SBA will decrease the pool of eligible offerors under the Rule of Two, 
and thus lowering size standards would lead to fewer small business 
set-asides overall due to the reduced applicability of the Rule of Two.
    An industry association recommended that SBA should not lower size 
standards. The association did not believe that lowering size standards 
would support the Administration's and SBA's goals to reverse a 
downward trajectory of fewer small businesses receiving Federal prime 
contracts. The association maintained that lowering size standards 
generally may further squeeze successful small businesses, limit 
returns on the Government's investments in small business growth and 
deprive agencies of increased competition. To support its argument, the 
commenter cited the Government Accountability Office (GAO) finding that 
only 22% of graduating businesses remain mid-size and only three 
percent of graduating businesses break through mid-size status to 
large. The commenter maintained that contracting trends also do not 
support lowering size standards as individual set-aside contracts have 
increased in value such that small businesses may be catapulted beyond 
their size standards, often in a single contract or task order. These 
small businesses face a tough situation: unable to remain qualified as 
``small,'' they must survive in ``full and open'' competitions with 
larger companies.
    A commenter representing the elevator industry believed that with 
increased inflation and raw materials costs, especially in 
construction-related industries with significant material outlays, 
broad-based lowering of size standards would be short-sighted and 
should not be enacted.
SBA Response
    All four comments addressing this issue opposed lowering size 
standards, generally. SBA receives periodic comments from the public 
that its size standards are too high in certain industries or for 
certain types of Federal contracting opportunities. The comments 
generally concern the competitive edge that large small businesses have 
over the ``truly small businesses'' (a phrase heard frequently from 
commentators). On the other hand, SBA also receives comments from 
larger small businesses that their size standards are too small to 
qualify for Federal contracting opportunities and other Federal small 
business assistance. This has always been a challenging issue, one that 
SBA has had to deal with over the years. SBA's size standards appear 
too large to the smallest of small businesses while larger small 
businesses often request even higher size standards. SBA examines four 
industry factors (average firm size, average assets size as a proxy of 
startup costs and entry barriers, 4-firm concentration ratio, and Gini 
coefficient) and small business participation in Federal contracting to 
determine if the existing industry size standards need to be adjusted. 
SBA considers analytical results, impacts of new size standards on 
small businesses, public feedback on proposed size standards, and the 
prevailing market conditions to decide on whether the size standard 
should be raised, lowered, or retained at the current level. SBA may 
lower calculated size standards if they are found to have enabled a 
dominant firm to qualify as small.
    Should SBA lower size standards regardless of prevailing economic 
conditions when the analytical results support lowering them, or should 
it consider the prevailing economic environment when deciding on 
whether to revise size standards?
    Three comments addressed this issue. One commenter supported the 
SBA's policy of not lowering size standards during periods of 
fluctuating economic conditions. The commenter argued that businesses 
do better when there is certainty in the rules, thereby allowing them 
to plan for the future.
    An industry association recommended that if SBA were to consider 
lowering size standards, such action should not be tied to the 
prevailing economic conditions. Rather, any such reduction should be 
based on an assessment of fluctuations in contracting that cannot be 
attributed to a single factor or economic period. It noted that the 
prevailing economic conditions are only one factor to consider and only 
represent a snapshot in time, instead of market understanding over 
time.
    SBA received a comment applauding SBA's effort to review size 
standards on a five-year basis and to raise standards

[[Page 74115]]

to counter the effects of inflation, thereby expanding opportunities 
for more small businesses to support Federal clients. Despite these 
efforts, however, the GAO and others have cited a decline in the number 
of small businesses supporting the Federal marketplace, the commenter 
noted. They also noted a significant drop in businesses out of the 
Federal market once they cross the ``valley of death'' into ``other 
than small'' business status, where businesses struggle to secure 
contract opportunities. Lowering size standards will only further 
exacerbate this situation, depriving agencies of both increased 
competition and skilled and experienced workforce. Instead, SBA should 
look into raising size standards to allow more small businesses to 
remain in the Federal marketplace longer, the commenter noted. The 
commenter stated that this would both expand the small business base 
for Federal agencies and improve the runway for these firms as they 
grow and ultimately graduate.
SBA Response
    Prior SBA policy has been to consider the prevailing economic 
environment when deciding on whether to revise size standards. In 
response to the distressed economic environment in the aftermath of the 
2007-2009 Great Recession, in the first five-year review of size 
standards under the Jobs Act, SBA adopted a policy of not lowering size 
standards even though the data supported lowering them for some 
industries. Similarly, in response to the COVID-19 pandemic and its 
impacts on small businesses and the overall economy, during the second 
five-year review of size standards under the Jobs Act, SBA adopted a 
similar policy of not lowering any size standards even though the 
analytical results supported lowering them. SBA will continue to 
consider the prevailing economic conditions and their impacts on small 
businesses in revising size standards as a secondary factor in its 
analysis.
    Should SBA adopt the disparity ratio approach to evaluating small 
business participation in the Federal market, which will replace the 
Federal contracting factor the Agency used in the past? Should SBA 
adopt the results from the power analyses of the disparity ratios?
    Four comments addressed this issue, all supporting the SBA's new 
disparity approach to account for Federal contracting trends. One 
commenter supported the new disparity ratio approach to evaluating 
small business participation in the Federal market, arguing that this 
new approach would better capture the entire spectrum of small business 
participation in Federal contracting. Another commenter also expressed 
strong support for the SBA's proposed adoption of the disparity ratio 
approach to account for small business participation in the Federal 
market. The commenter added that the proposed approach promises a more 
equitable and accurate reflection of small business participation in 
the Federal market, thereby making size standards that are more aligned 
with actual market participation and potential and enhancing ability of 
small businesses to secure Federal contracts. Another commenter also 
supported SBA's new disparity ratio approach to measure small 
businesses' share of Federal contracting in relation to the broader 
industry.
    An industry association recommended that SBA use the disparity 
ratio approach where it might lead to increased participation from 
under-represented industries. The association members believed the 
disparity ratio approach might, in some industries where small 
businesses are not well represented as prime contractors, help draw 
more contractors into the Federal space by increasing size standards. 
The industry association's view is that power analyses should not be 
used because they do not consider the actual performance of small 
businesses.
SBA Response
    Absent significant adverse comments, SBA is adopting the disparity 
ratio approach to measure the Federal contracting factor as proposed. 
In the previous Methodology, SBA only considered the small business 
share of Federal contract dollars relative to the small business share 
of total industry receipts. Under the disparity ratio approach, SBA is 
also considering the number of Federal contracts awarded to small 
businesses relative to their proportion in the population of firms that 
are ready, willing, and able to bid on and perform Federal contracts. 
Thus, the disparity ratio provides a more accurate representation of 
small business participation in the Federal market. Since only a very 
few industries were impacted by the power analyses, SBA has decided to 
not use the results from the power analyses, consistent with the 
industry association's recommendation.
    Should SBA continue using the Economic Census data to obtain the 
20th percentile and 80th percentile values of industry factors for 
evaluating size standards for exceptions, or should it start using 
FPDS-NG and SAM data?
    Three comments addressed this issue, with one supporting the SBA's 
proposal and two opposing it. One commenter supported the use of FPDS-
NG and SAM data for industry analysis for exception size standards. It 
makes sense that SBA should use the same consistent source of data 
throughout the analysis where possible, the commenter added.
    Another commenter disagreed with the SBA's proposal to use FPDS-NG 
and SAM data to obtain the 20th percentile and 80th percentile values 
of industry factors for evaluating size standards for the NAICS 
exceptions. The commenter contended that the use of FPDS-NG and SAM 
data would limit the SBA's analysis to the subset of companies engaged 
in Federal contracting only. Many small businesses rely on these size 
standards for purposes other than Federal contracting, the commenter 
added. The commenter recommended continuing to use the Economic Census 
data to obtain the 20th percentile and 80th percentile values of 
industry factors for evaluating size standard exceptions.
    Based on the input from its members, an industry association also 
recommended that SBA continue using Economic Census data because it 
captures firms not currently working in the Federal space and is 
therefore consistent with the intent of the Methodology. The 
association explained that if SBA were to rely on FPDS-NG and SAM data, 
the results would incorporate only a subset of firms working in a given 
industry that hold Federal contracts. Using Economic Census data paints 
a more accurate picture of firms operating in the various industries, 
in and out of Government, the commenter added.
SBA Response
    The data from the Census Bureau's Economic Census tabulation are 
limited to the six-digit NAICS industry level and therefore do not 
provide information on economic characteristics of firms at the 
subindustry level. Thus, SBA uses the FPDS-NG and SAM data to derive 
the industry factors for exceptions. To be consistent, SBA is proposing 
to adopt the FPDS-NG and SAM data to obtain the 20th percentile and 
80th percentile values of industry factors for evaluating size 
standards for the NAICS exceptions, instead of using the percentiles 
from the Economic Census. SBA believes that using the FPDS-NG and SAM 
data to obtain the 20th percentile and 80th percentile values of 
industry factors for evaluating size standards for the exceptions, 
instead of using the percentiles from the Economic Census, will promote

[[Page 74116]]

consistency in its analysis of the exceptions by ensuring that the 
percentile values and factor values for each exception are in 
comparable terms. Specifically, SBA has found that for most industries, 
the average firm size of businesses participating in Federal 
contracting is generally much larger than the average firm size of 
businesses represented in the Economic Census. There are also 
inconsistencies in reporting between the SAM/FPDS-NG data and the 
Economic Census, which SBA will address by adopting the revised 
approach. Thus, SBA believes that using the FPDS-NG and SAM data to 
obtain the percentile values of industry factors for the exceptions 
will better reflect the varying economic characteristics of the 
underlying industries. The full results of SBA's impact analysis as 
well as a detailed description of the major changes to SBA's evaluation 
of size standards are included in the 2024 Revised Methodology.
    Should size standards vary from program to program?
    SBA received two comments addressing this issue, with both 
expressing support for the SBA's position of not varying the size 
standards from program to program. One commenter opposed size standards 
to vary from program to program because many small businesses 
participate in more than one SBA's program. The commenter argued that 
changing size standards from program to program would create 
substantial confusion.
    An industry association recommended that, absent a clear benefit, 
size standards should not vary from program to program. The association 
believed that size standards need to be clearly understood by the 
acquisition community so that set-aside decisions and subcontracting 
goals can be realistically established. Adding additional sets of 
standards by program in addition to varying them from industry to 
industry would add multiple layers of complexity for small firms that 
may not have the resources to develop additional staff expertise in 
tracking the applicability of size standards for each program, 
especially for those involved in multiple programs, the commenter 
added.
SBA Response
    Consistent with the above comments, for all industries except for 
Wholesale Trade and Retail Trade industries, where businesses for SBA's 
financial and other Federal non-procurement programs qualify under the 
industry-specific size standards and those for Federal procurement 
qualify under the 500-employee nonmanufacturer size standard, SBA 
retains its policy of maintaining the uniform size standard for both 
procurement and non-procurement programs. SBA had, in the 1980s, 
established different size standards for different programs. The result 
had been that some firms were small for some programs and large for 
others. Such size standards were very confusing to users and caused 
unnecessary and unwanted complexity in their application. The statutory 
guidance encourages an industry-by-industry analysis and not a program-
by-program analysis when developing small business size definitions. 
While the characteristics and needs of a particular SBA's program may 
necessitate the deviation from the uniform size standards, the Agency 
will continue its general policy of favoring one set of size standards 
for all programs. For example, SBA has established 14 special size 
standards for specific activities (commonly referred to as 
``exceptions'') within certain industries for Federal procurement 
purposes. Additionally, for the SBA's SBIC, 7(a), and CDC/504 Programs, 
businesses can qualify either based on industry specific size standards 
for their primary industries or based on a tangible net worth and net 
income based alternative size standard.
    Should size standards apply nationally or should they vary 
geographically?
    Five comments addressed this issue, all opposing size standards 
varying geographically. One commenter asserted that size standards 
should apply nationally, not geographically, but did not provide 
reasons for its position. Another commenter also opposed geographically 
differing size standards. The commenter argued that the notion of 
geographically differing size standards is not reflective of the 
reality of the modern-day global economy, in which vendors and 
suppliers operate remotely and across multiple states and national 
boundaries. The commenter urged SBA to maintain uniform industry size 
standards across geographic regions.
    An industry association recommended that size standards should 
apply nationally, rather than geographically. The association agreed 
with the SBA's position that application of Economic Census data to 
determine size standards geographically would be at a minimum 
cumbersome and time consuming, resulting in a complex set of size 
standards that would likely be unusable. The association maintained 
that adding in a geographic variable would complicate the application 
of size standards for the reasons provided. For example, if applied at 
place of delivery or at multiple locations of delivery, how would the 
size standards differentiate between sizes of companies performing on 
that task order or between subcontractors and contractors? Application 
of size standards geographically would create more confusion than 
opportunity, the commenter added.
    A commenter representing the elevator industry believed that trying 
to segment size standards geographically would lead to a host of 
unintended consequences that would render the size standards impossible 
to effectively implement. The commenter asked how the size standards 
would be applied when a contractor is headquartered in one geographic 
region (such as a state) and performs contracts in others. Another 
commenter agreed with the SBA's position that varying size standards 
geographically would lead to undue complexity and the resulting 
confusion would render geographically based size standards unusable.
SBA Response
    The statute defines a small business concern as the one which is 
independently owned and operated and which is not dominant in its field 
of operation (15 U.S.C. 632 (a)(1)). The statute does not exclude from 
the definition those small businesses that might dominate their fields 
of operations within a specific geographic area. Whether a firm is 
``not dominant in its field of operation'' is made at the national 
level.
    The statute requires SBA to ensure that the size standard varies 
from industry to industry to the extent necessary to reflect the 
differing characteristics of the various industries (15 U.S.C. 
632(a)(3)). However, the statute does not require SBA to vary the size 
standard from geography to geography to account for geographical 
differences in industrial characteristics.
    If SBA were to establish size standards that would vary 
geographically, SBA would need to identify a proper unit of geography. 
Should it be the region, state, county, or other basis? Whatever basis 
SBA were to choose, SBA likely would need to vary each of the 1,000-
plus industry-based size standards by geography. This could result in 
tens or even hundreds of thousands of size standards using geography-
industry pairs. The public would then face the immense burden of 
reviewing, commenting on, and complying with those size standards.

[[Page 74117]]

    Another challenge with geographically varying size standards would 
be determining the applicable size standard when the vendor's location 
is different from the location of contract performance. Which size 
standard would be applicable in determining the small business status 
of the vendor? Should it be the size standard that applies to the area 
where the vendor is located, or should it be the size standard 
applicable to the location of contract performance? If vendor location, 
firms with multiple locations would either be subject to multiple size 
standards or a complex series to regulations to determine which 
location sets the size standard. If location of contract performance, 
firms would compete on an uneven basis because they would be subject to 
different size standards.
    Geographically varying size standards may inappropriately influence 
entrepreneurs' decisions on selecting business location. If size 
standards varied geographically, entrepreneurs would tend to be 
encouraged to move from places with lower size standards to places with 
higher size standards to receive the benefits of higher size standards. 
This may lead to potential disparities in entrepreneurship and business 
development among geographic regions. This might inadvertently suppress 
economic development in already-distressed regions as firms seek 
optimal locations based on regulatory compliance rather than economic 
forces.
    SBA determines the size standards based on special tabulations of 
business data from the Economic Census, which is compiled and reported 
nationally. The same level of details of Economic Census data is not 
available for smaller geographical units. SBA is required to set size 
standards that would exclude firms that are ``dominant in their field 
of operation,'' and that criteria is set nationally. As a result, in 
large part, the size standards are higher than they would be if the 
Agency were to look at smaller geographic areas because very few firms 
that are dominant locally are dominant nationally. Data limitations 
preclude an extensive analysis of businesses within specific industries 
on a geographical basis.
    For the above reasons and commenter's views discussed above, SBA 
will continue to establish and apply the size standards at the national 
level, without considerations to geographical differences in industry 
characteristics.
    Are there alternative approaches that SBA should consider for 
determining small business size standards?
    Two comments addressed this issue. One commenter suggested that SBA 
should reconsider establishing a common size standard for closely-
related NAICS codes, such as those under NAICS 5415, Computer Systems 
Design and Related Services. The commenter argued that, until the most 
recent revision, all 6-digit industries under NAICS 5415 had the same 
size standard because those NAICS codes are used interchangeably by 
agencies, resulting in confusion.
    An elevator company suggested that SBA should consider irrefutable, 
publicly available data provided by industry participants and industry 
expertise in the context of determining the size standard for the 
elevator industry. With respect to the elevator industry, the commenter 
argued that elevator maintenance, repair and modernization companies 
are vastly different from elevator inspection companies, and it would 
be inappropriate to lump them into one category simply because they 
both relate to the elevator industry. The commenter argued that 
companies involved in maintenance, repair and modernization of 
elevators are dramatically different from those companies involved in 
inspection of elevators. Compared to the latter, the commenter noted, 
the former have significant barriers to entry and very high 
concentration of large companies that dominate the market. Elevator 
inspection companies, on the other hand, have very low barriers to 
entry, do not require licensed mechanics, and have dramatically lower 
revenue per employee, and higher competition within the industry, the 
commenter added. The commenter contended that equipment needed to 
perform elevator inspection contracts is less costly than that required 
to perform maintenance contracts.
SBA Response
    The National Defense Authorization Act of Fiscal Year 2013 (NDAA 
2013) (Pub. L. 112-239, section 1661, Jan. 2, 2013) amended the Small 
Business Act to prohibit SBA from limiting the number of size standards 
and to require SBA to assign specific size standards for each NAICS 
industry. This limits the SBA's ability to group NAICS industries to 
establish a common size standard. Additionally, according to section 
3(a)(7) of the Small Business Act, SBA may establish or approve a 
single size standard for a grouping of 4-digit NAICS codes only the 
Agency makes publicly available, not later than the date on which such 
size standard is established or approved, a justification demonstrating 
that such size standard is appropriate for each individual industry 
classification included in the grouping. However, the results from the 
second 5-year review of the size standards under the Jobs Act (85 FR 
72484; November 13, 2020) did not support the same size standard for 
all industries in NAICS 5415. For example, calculated size standards 
for those industries varied from $20.5 million for NAICS 541511, Custom 
Computer Programming Services, to $32.5 million for NAICS 541513, 
Computer Facilities Management Services.
    With respect to the comment regarding the size standard for the 
elevator industry, SBA encourages the commenter to submit this 
information as comment to the proposed rule reviewing the monetary-
based size standards the Agency will issue as part of the forthcoming 
third 5-year review of size standards under the Jobs Act. As indicated 
elsewhere in this document, any concerns regarding the size standard(s) 
for a specific industry or group of industries are beyond the scope of 
the Methodology.
    How have SBA's latest size standards revisions impacted competition 
in general and within a specific industry?
    One company operating in the elevator industry noted that the 
elevator maintenance-related industry, usually classified under NAICS 
238290, Other Building Equipment Contractors, has a revenue-based size 
standard of $22 million, whereas elevator manufacturing industry, NAICS 
333921, Elevator and Moving Stairway Manufacturing, has a size standard 
of 1,000 employees. The commenter argued that the $22 million revenue 
size standard is a significant barrier to growth of elevator 
maintenance companies. The SBA current size standards have 
unintentional consequences for the elevator industry in terms of 
limiting competition, the commenter noted. The commenter argued that 
the current size standards for elevator related work have allowed 
multi-national, multi-billion elevator companies to dominate the 
Federal market. Elevator maintenance contracts are performed by highly 
trained and compensated personnel using expensive and sophisticated 
equipment, which leads to higher contract prices, causing elevator 
maintenance companies to perform fewer contracts before they exceed the 
revenue-based size standard, the commenter added. Thus, the commenter 
recommended that SBA should consider using an employee-based size 
standard of 1,000 employees for the elevator maintenance industry as 
revenue is not the best indicator of business size.

[[Page 74118]]

SBA Response
    With respect to the comment regarding the size standard for the 
elevator industry, SBA encourages the commenter to submit this 
information as comment to the proposed rule reviewing the monetary-
based size standards the Agency will issue as part of the forthcoming 
third 5-year review of size standards. As indicated elsewhere in this 
document, any concerns regarding the size standard(s) for a specific 
industry or group of industries are beyond the scope of the 
Methodology. Moreover, for industries with significant subcontracting, 
such as construction-related industries, SBA uses receipts, not 
employees, as a measure of business size for size standards purposes.
    Are there alternative or additional factors or data sources that 
SBA should consider when establishing, reviewing, or revising size 
standards?
    One commenter supported the omission from the Revised Methodology 
of the effects of industry dynamics, such as entry and exit of firms, 
mergers and acquisitions, and changes in market structure, on the size 
standards because it is impractical and unnecessary to account for 
these factors in the Methodology. The commenter maintained that SBA 
reviews and adjusts the size standards periodically, at least once 
every five years, to reflect the changes in the industry 
characteristics and market conditions. Therefore, the size standards 
are not static or fixed, but dynamic and flexible, and they can 
accommodate the variations and fluctuations in the industry dynamics 
over time, the commenter noted.
    Another commenter maintained that one factor that SBA should 
consider when establishing, reviewing, or revising its size standards 
is the impact of a reduction in size standards on the viability of 
small businesses. The commenter proposed making a reduced size standard 
become effective 180 days after publication of the final rule in the 
Federal Register.
    A comment from the elevator industry believed SBA should consider 
non-biased, irrefutable, and publicly available information provided to 
it by industry participants to supplement SBA determination of the size 
standard within a given industry. The commenter maintained that, while 
the Economic Census data provides a directionally accurate snapshot of 
certain industries, it is not a 100% accurate representation of the 
underlying facts related to companies' sizes within that industry. 
Additionally, certain industries are not clearly represented within the 
NAICS manual at all, namely, the elevator industry, the commenter 
noted. The commenter recommended that SBA should create a new NAICS 
code for the elevator industry and establish a size standard of 1,000 
employees, the same size standard that applies to the elevator 
manufacturing industry.
SBA Response
    The commenter's statement that the Methodology omits the factors 
such as entry and exit of firms and mergers and acquisitions is not 
quite correct. As a proxy of startup costs and entry barriers, SBA 
evaluates the average assets size as one of the four industry factors 
when establishing, reviewing, and modifying size standards. Similarly, 
mergers and acquisitions may lead to affiliation, thereby affecting the 
calculation of business size for size standards purposes. As part of 
the regulatory impact analysis of the proposed and final rules, SBA is 
required to include a statement describing the impact of size standards 
changes (including decreases) on small businesses in terms of access to 
small business assistance. Similarly, as part of its decision on 
whether to revise a size standard, SBA examines, as a secondary factor, 
impacts of size standards changes on small business access to and 
eligibility for Federal assistance. In most cases, SBA allows the final 
rules to become effective 30 days from their publication in the Federal 
Register. Thus, assuming that the size standards revisions include both 
increases and decreases, it would be impractical to make a higher size 
standard effective 30 days from the date of publication of the final 
rule in the Federal Register and delay the effective date for a lower 
size standard to 180 days. Delaying the effective date for higher size 
standards to 180 days would prevent some larger small businesses from 
realizing the benefits of size standards increases. SBA always 
encourages industry participants to provide, as part of their comment 
to the proposed rules, the alternative industry data or facts 
pertaining to a specific industry's size standard. SBA will consider 
such data or facts very thoroughly and may even adjust the proposed 
size standard as a result.
    Does SBA's current approach to establishing or modifying small 
business size standards make sense in the current economic environment?
    Four comments addressed this issue. One commenter agreed that the 
SBA's current approach to establishing or modifying small business size 
standards makes sense in the current economic environment and supported 
the SBA's policy of not lowering size standards during periods of 
fluctuating economic conditions.
    Another commenter, a woman-owned small business (WOSB), operating 
under NAICS 236220, Commercial and Industrial Building Construction, 
expressed appreciation for revisions to size standards in response to 
the fluctuations in economic conditions due to the COVID-19 pandemic 
and believed that the Revised Methodology will provide further 
refinements to the considerations of industry factors and Federal 
market conditions.
    An industry association asserted that the current approach is the 
most practical approach at this time. Establishing a different approach 
to small business size standards would be a complex challenge that 
should be undertaken with clear objectives and with sufficient time to 
conduct analyses and assess the potential results of alternative 
approaches, the commenter added.
    A comment from the elevator company felt that the SBA's current 
approach does a very good job of accounting for inflation and other 
macroeconomic environment affecting small businesses. The periodic size 
standard increases to account for inflation have been handled 
expeditiously and been beneficial to all small businesses, the 
commenter added. However, the commenter felt the SBA should consider 
irrefutable publicly available information from industry participants 
relating to any given industry. SBA should consider such information to 
better support its effort to establish a correct size standard for an 
industry in question.
SBA Response
    SBA agrees with the commenters that the Revised Methodology makes 
sense in the current economic environment. SBA will continue to 
consider the prevailing economic environment when deciding on whether 
the size standards should be revised or retained at the current levels. 
SBA is committed to complete the quinquennial reviews of size standards 
under the Jobs Act in a timely manner to ensure that size standards 
reflect current market conditions. Similarly, SBA is also committed to 
periodically assess the impacts of inflation on monetary-based size 
standards and make necessary adjustments.

3. Other Issues

    Provide detailed data and calculated size standards.
    SBA received three comments demanding that SBA provide the

[[Page 74119]]

underlying data involved in the calculations for the Methodology and 
calculated size standards under the Revised Methodology. One commenter 
asked SBA to provide a detailed table showing size standards under the 
current Methodology and those under the Revised Methodology to be 
better able to provide comments to proposed changes to the Methodology.
    Another commenter asked if it is possible for SBA to provide access 
to the data used in the calculations in the white paper. Without this 
data it is impossible to make an assessment if the Methodology 
determines fair and reasonable size standards, the commenter argued. 
The problem with the Methodology is that it appears to use data that is 
not available to the public, the commenter added. Without access to 
this data, it is difficult to compare the results of the Methodology, 
and perhaps have the ability to look for and point out problems or 
areas for improvement in the Methodology.
    Another commenter requested that SBA provide a detailed analysis of 
how proposed changes, especially the adoption of the disparity ratio 
approach and the utilization of the FPDS-NG and SAM data, will affect 
small businesses across various industries, especially an assessment of 
potential impacts on small business participation in Federal 
contracting.
SBA Response
    SBA has provided a summary of calculated industry size standards 
under the 2019 Methodology and the 2024 Revised Methodology in Table 15 
under the Impacts of Changes Methodology Section of the Revised 
Methodology. Of 392 industries averaging $20 million or more in Federal 
contracting annually during fiscal years 2020-2022, based on the latest 
data available to SBA when the Revised Methodology was prepared, 159 or 
40.5% of industries would see an increase to size standards under the 
2019 Methodology, as compared to 169 or 43.1% of industries that would 
see an increase to size standards under the 2024 Revised Methodology. 
Similarly, 169 or 43.1% of industries under the 2019 Methodology and 
167 or 42.6% of industries under the 2024 Revised Methodology would see 
a decrease to size standards. Sixty-four or 16.3% of industries under 
the 2019 Methodology and 56 or 14.3% of industries under the 2024 
Revised Methodology would see no change to size standards. Thus, 
comparing the results from the 2019 Methodology and the 2024 
Methodology, slightly more industries would see an increase to size 
standards under the 2024 Methodology and slightly more industries would 
see no change to size standards under the 2019 Methodology. Thus, 
overall, the changes to size standards as the result of the changes in 
the Methodology would have a very minimal impact on number of 
businesses that qualify as small. Excluding Sectors 42 and 44-45, 
97.77% of businesses would qualify as small under the calculated size 
standards under both Methodologies. That figure is 97.78% under the 
current size standards.
    Inconsistency between general size standards and exceptions.
    One commenter, referring to the size standards for the general 
NAICS 237990, Other Heavy and Civil Engineering Construction, and the 
Dredging subindustry (or ``exception'') under that industry, stated 
that there exists inconsistency between size standards for general 
NAICS industries and size standards at the subindustry levels or 
``exceptions,'' especially when the size standard for a general NAICS 
industry is lower than the size standard for a subindustry or exception 
within that industry. The commenter contended that this could create 
confusion or unfairness for businesses that operate in both the NAICS 
industry and the subindustry or exception, or that compete with 
businesses that do, by allowing them to qualify as small under the 
exception but not small under the general NAICS industry. It may also 
affect the accuracy and consistency of the data and statistics that SBA 
and other agencies collect and report on the small business sector, the 
commenter argued. The commenter suggested that SBA provide a clear 
rationale and a consistent rule for handling the cases of inconsistency 
between the size standards for general NAICS industries and their 
corresponding subindustry or exception size standards.
SBA Response
    The Small Business Act requires that size standards vary from 
industry to industry to reflect differing characteristics among the 
various industries. Thus, it is not uncommon for a firm operating in 
multiple industries to be small in some industries and other than small 
in others. That also applies to size standards for the general NAICS 
industry size standards and the size standards at the subindustry 
levels or exceptions. Except for the Dredging exception that has a 
lower size standard than that for the general NAICS 237990, usually 
size standards at the subindustry levels (``exceptions'') are larger 
than those for the general industries. Thus, it is not unusual for 
companies operating both under general NAICS industry and subindustry 
levels to be small under the exception size standards and other than 
small under the general NAICS size standards. It is logical for a firm 
to be other than small under the Dredging exception and to be small 
under the general NAICS 237990 because the characteristics of firms of 
that specific sublevel may be different from the characteristics of the 
firms that constitute the general level, of which there may be a much 
greater number. The subindustry categories are used solely for Federal 
procurement purposes and are not used by the Government to collect 
industry statistics.
Analytical Equations
    One commenter stated that while the equations that SBA uses to 
calculate size standards, such as simple average, weighted average, 
linear transformation, and linear interpolation are simple and easy to 
implement, they may not capture the complexity and diversity of the 
industries and the market conditions.
    1. Weighted average: The commenter argued that by assigning higher 
weights to larger firms, a weighted average may provide a more accurate 
and representative measure of the industry characteristics than a 
simple average, which treats all data equally, but it may also 
introduce some problems, such as data availability and reliability, and 
it may make the calculation and communication of the size standards 
more complex and less transparent. Without providing any facts and 
analysis, the commenter argued that the weighted averaged may not be 
consistent with the legislative intent and the SBA's statutory mandate 
to consider the industry characteristics of all businesses in an 
industry.
SBA Response
    SBA does not face any problem of data availability and reliability 
in calculating the weighted average firm size. The Economic Census 
special tabulation that SBA receives from the U.S. Census Bureau to 
examine industry structure contains the results for weighted average, 
along with other measures (such as simple average firm size, 4-firm 
concentration ratio, Gini coefficient, etc.), calculated based on 
actual firm-specific data. SBA used the weighted average firm size as 
one of the factors to evaluate industry structure in both the first and 
second five-year reviews of size standards under the Jobs Act but did 
not receive any adverse comments or complaints from the public or 
industry participants citing its complexity or lack of transparency. 
Therefore, SBA will continue using the

[[Page 74120]]

weighted average firm size as one of the factors to evaluate industry 
structure.
    2. Linear transformation: The commenter suggested replacing a 
linear transformation of industry characteristics with a logarithmic 
transformation to reduce the skewness and outliers in the data and to 
improve the normality and homoscedasticity of the distribution. 
However, a logarithmic transformation may also complicate the 
calculation and communication of the size standards, and it may not be 
simpler and more transparent than a linear transformation, the 
commenter argued. Furthermore, the commenter added that a logarithmic 
transformation may affect the clarity and transparency of the size 
standards, as it may make the size standards less intuitive and more 
difficult to understand and verify by businesses and Federal agencies 
that use them. Therefore, the commenter recommended weighing the 
benefits and drawbacks of using a logarithmic transformation and 
compare it with the current method of using a linear transformation, 
which is simpler, transparent, consistent, and stable.
SBA Response
    As maintained elsewhere, the special tabulation of the quinquennial 
Economic Census that SBA receives from the U.S. Census Bureau contains 
various measures of industry characteristics (e.g., simple average firm 
size, weighted average firm size, four-firm ratio, and Gini 
coefficient, etc.) that SBA evaluates in analyzing size standards. The 
Census Bureau calculates these measures from the original, raw firm-
specific data without any transformation of such data. SBA does no 
transformation of the results provided by the Census Bureau. Thus, the 
potential problems with linear transformation that the commenter 
identified are nonissues. Moreover, as noted by the commenter, the 
logarithmic transformation has several drawbacks, including that it is 
complex, less transparent, difficult to understand, and unstable.
    3. Linear interpolation: The commenter suggested using a nonlinear 
interpolation, such as a spline or a polynomial, instead of a lineal 
interpolation to capture the potentially nonlinear relationships 
between industry characteristics and size standards. The commenter 
argued that an industry with a high degree of competition or innovation 
may have a more complex or dynamic relationship between the industry 
characteristics and the size standards, which may not be adequately 
captured by a linear interpolation. However, the commenter noted that 
using a spline or a polynomial interpolation may introduce more 
uncertainty and variability in the results, and it may not be more 
stable and consistent than a linear interpolation. Additionally, a 
spline or a polynomial interpolation may impair the simplicity and 
clarity of the size standards, as it may make the calculation and 
communication of the size standards more sophisticated and less 
straightforward, the commenter noted.
SBA Response
    The commenter recommended using a spline or nonlinear 
interpolation, instead of linear interpolation, to capture the 
potentially nonlinear relationships between industry factors and size 
standards. However, it contended that using a spline or a polynomial 
interpolation may introduce more uncertainty, complexity, 
inconsistency, variability, and instability in the results. We have 
found a linear interpolation to produce reasonable results that are 
more intuitive, more straightforward, and easier to explain to the 
stakeholders. Moreover, generally there is a positive correlation 
between industry factors and size standards.
    Use of gross domestic product (GDP) price index.
    One commenter supported the use of the GDP price index as the 
measure of inflation because it captures the overall changes in the 
prices of goods and services produced in the economy, which affect the 
costs and revenues of businesses in all industries. The commenter added 
that alternative measures of inflation, such as the Consumer Price 
Index (CPI) or the Producer Price Index (PPI), may not be suitable 
because they focus on specific segments of the economy, such as 
consumers or producers, and may not reflect the diversity and 
complexity of the business activities and transactions.
SBA Response
    As part of the 2014 inflation adjustment (79 FR 33647; June 12, 
2014), SBA reviewed various measures of inflation published by the 
Federal Government, including the GDP price index, the CPI, the PPI, 
the personal consumption expenditures (PCE) price index, and the unit 
labor cost for their appropriateness to use for adjusting monetary-
based size standard for inflation. Based on that review, SBA determined 
that, being the most comprehensive measure of price movements for the 
overall economy, the GDP price index is the most appropriate measure of 
inflation for purposes of adjusting size standards for inflation. 
Historically, SBA has used the GDP price index for adjusting size 
standards for inflation.
    Inclusion of the 4-firm ratio.
    One commenter stated that the application of the 4-firm 
concentration ratio to all industries is reasonable because it is a 
simple and widely used indicator of market structure and competition. 
It measures the share of the total industry revenue that is earned by 
the four largest firms in the industry, and it ranges from 0 to 100, 
where higher values indicate higher concentration and lower values 
indicate lower concentration. The 4-firm concentration ratio is also 
consistent with the SBA's statutory mandate to consider the degree of 
competition among businesses in an industry when setting the size 
standards.
SBA Response
    Using the 4-firm concentration ratio SBA compares the degree of 
concentration within an industry to the degree of concentration of the 
other industries with the same measure of size standards. The 4-firm 
concentration ratio is widely used as a measure of industry 
concentration. Prior to the 2019 Methodology, SBA used the 4-firm 
concentration ratio only for the industries where its value was 40% or 
higher. Starting from the 2019 Methodology, SBA started using the 4-
firm concentration ratio for all industries regardless of its 
magnitude. If a significantly higher share of economic activity within 
an industry is concentrated among the four largest firms compared to 
most other industries, all else being equal, SBA would set a size 
standard that is relatively higher than for most other industries. 
Conversely, if the market share of the four largest firms in an 
industry is appreciably lower than the similar share for most other 
industries, the industry will be assigned a size standard that is lower 
than those for most other industries.
    Decreases to size standards.
    Citing the information provided on page 56 of the Revised 
Methodology that under the disparity ratio approach, 167 or 42.6% of 
industries averaging $20 million or more in Federal contracting would 
see a decrease on size standards, one commenter asked SBA to clarify 
whether it intends to decrease size standards for some industries based 
on proposed changes in the Methodology.
SBA Response
    The question of whether SBA would increase, decrease, or retain the 
size standards is beyond the scope of the

[[Page 74121]]

Methodology. The Methodology merely provides the framework for 
reviewing and calculating new size standards, but it does not drive 
SBA's determination on whether to revise or retain size standards. That 
determination will be made through rulemakings with the considerations 
of the results from the latest available industry and Federal 
procurement data, comments to the proposed changes in size standards, 
impacts of proposed size standards changes on small business access to 
Federal small business assistance, the prevailing economic conditions 
and their impacts on small businesses, and Administration's and SBA's 
policies and programs.
    Impact of the revised methodology.
    One commenter asked if SBA has calculated the impacts of its 
proposed changes in the Revised Methodology on the size standards for 
each of NAICS 6-digit level industries? If so, what is the projected 
impact on NAICS 541330, Exception 1, Military and Aerospace Equipment 
and Military Weapons, the commenter asked.
SBA Response
    As discussed elsewhere in this document, SBA provided in Table 13 
of the Revised Methodology a summary of impacts of proposed revisions 
to the Methodology on the size standards for 6-digit NAICS industries 
averaging $20 million or more in Federal contracting. SBA did not 
provide that information for the specific NAICS industries or 
subindustries because that would change when SBA updates the industry 
and Federal procurement data. The information on the changes in the 
size standard for a specific NAICS industry or subindustry would be 
provided in the proposed rules that Agency will publish in the near 
future as part of the third 5-year review of size standards under the 
Jobs Act.
    Calculation of receipts under subcontracting.
    One commenter noted that to perform complex Government contracts 
successfully, small business prime contractors must frequently 
subcontract significant portions of work to large businesses or other 
small businesses. The commenter argued that under the employee-based 
size standards, the number of subcontractor employees working on a 
contract is not counted as part of the small business prime 
contractor's employee total. However, under receipts-based size 
standards, the subcontractor's share of contract receipts is included 
in the small business prime contractor's total annual receipts despite 
the facts that these receipts, other than administrative costs, are not 
part of the prime contractor's annual revenue, the commenter added. Has 
the SBA considered making the two standards consistent with each other 
by excluding subcontractor annual receipts from a small business prime 
contractor's annual receipts total, the commenter asked.
SBA Response
    According to 13 CFR 121.104, receipts for size standards purposes 
means all revenue in whatever form received or accrued from whatever 
source, including from the sales of products or services, interest, 
dividends, rents, royalties, fees, or commissions, reduced by returns 
and allowances. Regarding the comment that SBA should modify its 
definition of receipts to allow for the exclusion of amounts paid to 
third-party subcontractors (usually referred to as ``pass-throughs''), 
SBA disagrees. SBA does not allow for the exclusion of ``pass-
throughs'' because they are part of the usual and customary costs of 
doing business. Accordingly, SBA considers ``pass-throughs,'' and other 
similar factors, as secondary factors when it establishes small 
business size standards. Specifically, the Economic Census data that 
SBA uses in its size standards analysis includes all revenues received 
by companies, including the values of their subcontracts. If the 
``pass-throughs'' were allowed to be excluded from the calculation of 
receipts, SBA would also have to revise its methodology to establish a 
lower size standard to reflect the size of the industry without them. 
Thus, SBA does not believe it is reasonable to exclude these costs from 
the calculation of receipts.
    Calculation of receipts for joint ventures.
    A commenter stated that to successfully bid on and perform complex 
Government contracts small businesses must occasionally enter into 
joint venture agreements with other small businesses in the same 
industry. The current regulations and proposed modifications do not 
adequately address how the division of contract receipts among joint 
ventures should be used to calculate an individual company's annual 
receipts for purposes of small business size standards calculations, 
the commenter argued. The commenter noted that the current regulations 
also do not adequately address how receipts allocated to subcontractors 
should be apportioned in calculating the annual receipts of the small 
business joint ventures. Has the SBA considered amending its size 
standards methodology and regulations to address allocation of annual 
receipts, the commenter asked.
SBA Response
    For size standards calculations, a concern must include in its 
receipts its proportionate share of joint venture receipts. 
Proportionate receipts do not include proceeds from transactions 
between the concern and its joint ventures (e.g., subcontracts from a 
joint venture entity to joint venture partners) already accounted for 
in the concern's tax return. In determining the number of employees, a 
concern must include in its total number of employees its proportionate 
share of individuals employed by the joint venture. For the calculation 
of receipts, the appropriate proportionate share is the same percentage 
of receipts or employees as the joint venture partner's percentage 
share of the work performed by the joint venture. For a populated joint 
venture (where work is performed by the joint venture entity itself and 
not by the individual joint venture partners) the appropriate share is 
the same percentage as the joint venture partner's percentage ownership 
share in the joint venture. For the calculation of employees, the 
appropriate share is the same percentage of employees as the joint 
venture partner's percentage ownership share in the joint venture, 
after first subtracting any joint venture employee already accounted 
for in one of the partner's employee counts. See 13 CFR 121.103(h)(3).

4. General and Industry Specific Size Standards

    General size standards.
    Without providing any facts or analysis, a comment from an advocacy 
organization for WOSBs argued that SBA's current industry size 
standards do not incentivize small business growth. The commenter 
maintained that under the current size standards, small businesses face 
risk of losing their small business status if their revenue exceeds a 
certain threshold due to a single high revenue generating contract. The 
commenter cited a testimony from a WOSB to the February 6, 2023, House 
Small Business Committee Hearing on size standards, arguing that her 
business has been teetering on the edge of its small business size 
standard, which puts her in a difficult position as she plans the 
future of her business. She testified to the Committee that if she lost 
her small business size status, she would have to lay off at least 30% 
of her staff of 95 people, the commenter added. The commenter contended 
that businesses that lose their small business status may lose 
opportunities to win

[[Page 74122]]

contracts, given that midsized businesses are set up to compete against 
much larger companies with more resources. Small business owners do not 
have many options if they are at risk of losing their status, the 
comment noted. The commenter stated that they are forced to reduce or 
cap their revenue, sell off part of their business, or team up with 
another small firm to keep their status. In case of teaming up with 
another firm, small businesses only retain 49% of contracts they 
earned, the commenter argued.
SBA Response
    While SBA recognizes challenges the larger small businesses close 
to exceeding size standards and mid-size firms that have already 
exceeded the size standards face in competing in the Federal market, 
deliberations of such issues are beyond the scope of the Revised 
Methodology. SBA notes that there will always be some businesses in the 
brink of exceeding the size standards regardless how high the size 
standards are. To address the concerns that midsized businesses face in 
the Federal market, SBA recently implemented the Congressional 
enactments to increase the averaging period for calculating annual 
receipts from 3 years to 5 years (Pub. L. 116-283) and averaging period 
for calculating the number of employees from 12 months to 24 months 
(Pub. L. 115-324). As advised elsewhere in this document, the 
commenters are advised to submit any concerns regarding the size 
standards for specific size standards when SBA issues for comment the 
proposed rule covering their industries.
    Industry-specific size standards.
    NAICS 236220, Commercial and Institutional Building Construction.
    Citing the lingering economic impacts from the COVID-19 pandemic 
and high post-pandemic inflation, a commenter proposed increasing the 
size standard for NAICS 236220, from the current $45 million in average 
receipts to $50 million. The commenter did not provide any industry 
analysis and facts supporting its proposal.
SBA Response
    The latest industry and Federal contracting data that SBA used to 
prepare the proposed rule to review the size standards for industries 
in the construction sector (NAICS 23) under the Jobs Act supported a 
size standard of $25.5 million size standard for NAICS 236220 (85 FR 
62239; October 2, 2020). Because of the SBA's policy of not lowering 
any size standard in light of the impacts of the COVID-19 pandemic on 
small businesses and the overall economy, in the final rule (87 FR 
18607; March 31, 2022), SBA adopted the existing $39.5 million existing 
size standard, which was later increased to $45 million as part of 
inflationary adjustment in 2022 (87 FR 69118; November 17, 2022). As 
advised elsewhere in this document, the commenters are advised to 
submit any concerns regarding the size standards for specific 
industries when SBA issues for comment the proposed rule covering their 
industries.
    NAICS 541330, Engineering Services.
    Citing reasons such as the use of the qualifications-based 
selection process under the Brooks Act, which is said to be dominated 
by the largest firms, the high degree of concentration of the Federal 
market share among the top 10 largest companies, and the Federal 
Government's increasing reliance on limited competition contract 
vehicles (such as IDIQs and GWACs) to procure engineering services, the 
commenter recommended increasing the size standards for NAICS 541330 to 
$39.5 million in average annual revenue. The commenter attached its 
comment it submitted to the proposed rule published as part of the 
second 5-year review of size standards under the Jobs Act and its March 
27, 2021, letter to the SBA's Administrator urging the Agency to 
establish a $39.5 million size standard for NAICS 541330.
SBA Response
    As part of the second 5-year review of size standards under the 
Jobs Act, based on the latest available industry and Federal 
procurement data, SBA had proposed increasing the size standard for 
NAICS 541330 from $16.5 million to $22.5 million as part of the second 
5-year review of size standards (85 FR 72584; November 13, 2020). Based 
on the considerations of public comments and industry data, SBA adopted 
$22.5 million in the final rule (87 FR 18665; March 31, 2022), which 
SBA increased to $25.5 million as part of adjustment of monetary based 
size standards for inflation in 2022 (87 FR 69118; November 17, 2022). 
The concerns regarding the size standards for specific industries are 
beyond the scope of the Revised Methodology. The Methodology merely 
provides an analytical framework for reviewing existing and calculating 
new size standards. SBA's actual decisions to change or modify size 
standards are implemented through rulemakings. SBA encourages the 
commenters to submit their concerns regarding the size standards for 
specific industries, including any relevant data and analysis, by 
commenting on the forthcoming proposed rules reviewing size standards 
for those industries.
    NAICS 336611, Ship Building and Repairing.
    SBA received a comment from a small business concern operating 
under NAICS 336611 that currently has a size standard for 1,300 
employees. The commenter stated that the ship building and repairing 
market is dominated by very large companies with tens of thousands of 
employees that receive funds from the Federal Government, enabling them 
to improve their facilities and equipment and to make ship building 
more efficient. Large businesses leverage these same efficiencies when 
competing against small businesses, creating an unfair competitive 
advantage, the commenter contended. The commenter asserted that with 
the size standard of 1,300 employees, the industry is currently very 
competitive. Large businesses constantly lobby the Federal Government 
to increase their market share at the expense of the market share of 
small businesses that lack resources and constituent base for lobbying, 
the commenter added. A business with 1,300 employees would have revenue 
in the range of $300 million, which is certainly not a small business 
in the ship repair industry, the commenter argued. The commenter, based 
on above factors, urged that SBA should not increase the size standard 
for NAICS 336611 beyond 1,300 employees, as doing so would enable large 
businesses to compete against small businesses as small businesses.
SBA Response
    The latest industry and Federal procurement data that was available 
for SBA to review the size standard for Manufacturing industries as 
part of the second 5-year review of size standards under the Jobs Act 
supported a size standard of 1,300 employees for NAICS 336611, an 
increase from 1,250 employees (87 FR 24752; April 26, 2022). 
Accordingly, in the final rule, SBA adopted 1,300 employees as the size 
standard for NAICS 336611 (88 FR 9970; February 15, 2023). As stated 
elsewhere, the concerns regarding the size standards for specific 
industries are beyond the scope of the Revised Methodology. The 
Methodology merely provides an analytical framework for reviewing 
existing and calculating new size standards. SBA's actual decisions to 
change or modify size standards are implemented through rulemakings. 
SBA encourages the commenters to submit their concerns regarding the 
size standards for specific industries, including any relevant data and

[[Page 74123]]

analysis, by commenting on the forthcoming proposed rules reviewing 
size standards for their industries.
    Environmental remediation services (ERS) exception to NAICS 562910, 
Remediation Services.
    A commenter stated that the ERS exception, first established in 
1994 (59 FR 47236; September 15, 1994), is fundamentally different from 
most other exceptions. The commenter contended that all exceptions--
except the ERS exception and the exceptions to Research and Development 
(R&D) NAICS codes--are derived from subsets of the primary NAICS 
industry from which the subindustry or exception originates. While the 
size standards for exceptions to R&D NAICS codes are derived by 
aligning the corresponding manufacturing size standards, the ERS 
exception, unlike all other exceptions, is not derived from the subset 
of the primary NAICS 562910, the commenter added. The commenter argued 
that such uniqueness of the ERS exception comes from the original 
formulation of the ERS industry, as reflected in Footnote 14 of the 
SBA's table of size standards which recognizes that no single industry 
dominates the scope of the ERS work. The commenter contended that the 
ERS exception is a superindustry instead of a subindustry. Some firms 
competing in ERS may designate the base NAICS 562910 as their primary 
industry, but others may not, the commenter noted.
    The commenter expressed concerns about the SBA's approach to 
creating the ERS industry by trimming the largest ERS awardees whose 
primary activity is unrelated to ERS. The commenter expressed the 
opinion that excluding such firms is arbitrary and nonsensical within 
the meaning of Footnote 14. The commenter proposed to identity a 
primary industry for each ERS awardee and to exclude those which do not 
align with industries that SBA used to formulate the ERS industry 
originally. If this proposed solution is not acceptable to SBA and if 
SBA still decides to remove large companies form the dataset in future 
rulemakings, the commenter recommended that SBA provide a list of the 
specific firms removed from the dataset. This approach would provide 
greater transparency and would allow industry participants to comment 
on whether the removed companies were or were not significant players 
in the ERS market, the commenter argued. The commenter further argued 
that removing large companies, unknown to the public, from SBA's 
dataset, without providing opportunity for industry feedback on the 
propriety of specific exclusions, introduces opacity and arbitrariness 
that ultimately undermines the credibility of SBA's Methodology. The 
industry cannot provide meaningful comment as to whether an excluded 
firm is an ERS competitor if the SBA is not transparent and does not 
identify the excluded firms, the commenter argued.
    The commenter argued that large competitors in the ERS industry 
have a serious advantage over smaller businesses in terms of winning 
and executing work, even where only a small portion of their total 
revenue comes from ERS work. Large firms enjoy economies of scale that 
would give them a tremendous competitive advantage over a small 
business making roughly similar revenue. The commenter explained that 
many ERS awards are qualifications based, meaning that the company must 
demonstrate it has a superior performance history and workforce when 
considering the qualifications sought in the request for proposal. A 
large company with a more diverse performance history can leverage the 
relevant qualifications to win work.
    The commenter maintained that to the extent competitions are 
instead based on price criteria, a large business performing a 
comparatively small amount of ERS work also has a disproportionate 
advantage over smaller companies. The commenter argued that a large 
company with a comparatively small ERS portfolio can spread the same 
ERS workload across a much larger workforce, using a more favorable 
labor mix, achieving greater labor utilization, and driving down 
indirect costs. These advantages have a direct impact on pricing, the 
commenter noted. Moreover, the large business can take advantage of 
greater corporate resources to hire, train, and deploy labor, further 
disadvantaging small businesses who must consider the total headcount 
impact of hiring to perform management and overhead tasks, the 
commenter added.
    Excluding the largest businesses from the sample will have a 
deleterious effect on the viability of small businesses in the ERS 
industry, the commenter stated. The commented noted that SBA's size 
standards provide small businesses a protected marketplace in which to 
grow and prepare for future open competition. However, setting size 
standards at an artificially low threshold prematurely thrusts 
successful ERS small businesses into the same marketplace occupied by 
their largest competitors. This will cause graduating ERS small 
businesses to suffer unequal and inferior protection when compared to 
other graduating small businesses. This outcome would appear to be 
inconsistent with the statutory goal of the SBA to grow small 
businesses into the American marketplace.
SBA Response
    SBA does not agree with the commenter that SBA has kept the size 
standard for the ERS exception artificially low. Between 2016 and 2023, 
the ERS size standard has doubled to 1,000 employees. Despite the 
majority of comments opposing any increase to the ERS size standard, in 
2016, SBA increased it from 500 employees to 750 employees, as part of 
the first 5-year review of size standards under the Jobs Act (81 FR 
4436; January 26, 2016). Again, despite the majority of comments 
opposing any increase to the ERS size standard, in 2023, SBA increased 
the ERS size standard from 750 employees to 1,000 employees, as part of 
the second 5-year review of size standards (88 FR 9970; February 15, 
2023).
    Without trimming the largest companies for which the ERS contract 
awards account for a minimal share of their total revenues, SBA is 
concerned that the data might result in a very high size standard that 
might hurt smaller ERS companies that need Federal assistance the most. 
Just as graduating midsized companies have a hard time competing on 
unrestricted Federal contracts with large companies with vast resources 
and an extensive performance history, smaller small ERS firms also face 
a competitive disadvantage in competing with larger, more experienced 
small businesses for set-aside Federal contracts.
    As stated elsewhere, the industry data in the quinquennial Economic 
Census tabulations that SBA receives from the Census Bureau are limited 
to the 6-digit NAICS industry. Thus, the industry data in the special 
tabulation does not allow for the evaluation of the size standards at 
the subindustry levels or exceptions. Accordingly, SBA utilizes the 
FPDS-NG and SAM data to calculate industry factors at the subindustry 
levels. The results from the FPDS-NG/SAM data are then compared with 
industry benchmarks (such as 20th percentile and 80th percentile values 
of industry factors) from the Economic Census tabulation to compute the 
new size standards for the exceptions. In the Economic Census 
tabulation, the industry data are tallied by a primary NAICS industry. 
Thus, to make the FPDS-NG/SAM results consistent with the results from 
the Economic Census, SBA trims the firms, from both ends of the 
distribution, for which a specific exception under review is not their 
primary industry. Going forward, in the Revised Methodology, SBA will 
base the

[[Page 74124]]

20th percentile and 80th percentile values of industry factors for the 
exceptions also on the FPDS-NG and SAM data, thereby largely reducing 
the need of trimming firms for which a particular exception in question 
is not their primary industry. If the trimming is still warranted, SBA 
will try to be transparent regarding the firms being trimmed while 
protecting their privacy.
    Recognizing that, by definition, the ERS exception includes 
activities from multiple industries, a new footnote (Footnote 54) has 
been added to the Revised Methodology, stating that to evaluate the ERS 
size standard SBA will identify identify firms receiving contracts in 
the various NAICS industries under the PSCs that correspond to the ERS 
exception.
    Elevator size standard.
    A commenter argued that there is no NAICS code that specifically 
applies to the elevator industry. In absence of a separate NAICS code 
for the elevator industry, the commenter provided a list of NAICS codes 
that Federal contracting officers use to classify elevator maintenance, 
repair, and modernization contracts:

<bullet> NAICS 811310--Commercial and Industrial Machinery & Equipment 
(size standard of $12 million)
<bullet> NAICS 238290--Other Building Equipment Contractors ($22 
million)
<bullet> NAICS 236220--Commercial and Institutional Building 
Construction ($45 million)
<bullet> NAICS 561210--Facility Support Services ($47 million)
<bullet> NAICS 333921--Elevator and Moving Stairway Manufacturing 
(1,000 employees)

    For an elevator modernization/construction contract, the commenter 
contended that contracting officers typically use either NAICS 238290 
or NAICS 236220. Under this scenario, an elevator company can be 
awarded a modernization project as a small business under NAICS 236220 
but would be unable to bid, as a small business, on the maintenance 
contract under NAICS 238290 because they are considered too ``large'' 
under that NAICS industry. The commenter argued that the fact that all 
elevator companies perform both modernization and maintenance tasks, 
but are deemed small enough to perform one, but too large to perform 
the other, is an oversight that should be corrected.
    The commenter maintained that every elevator company in the country 
performs elevator maintenance, repair, modernization, and construction, 
and recommended that SBA lump all these activities together and create 
a unique NAICS code for the elevator industry and establish an 
employee-based size standard of 1,000 employees. With an elevator-
specific NAICS code, there would be no guesswork by contracting 
officers in choosing an appropriate NAICS code for elevator 
maintenance, repair, modernization and construction work, the commenter 
noted. Due to the lack of a single NAICS code representing the elevator 
industry, the commenter noted that elevator-related contracts 
(maintenance and modernization) are generally awarded to general 
contractors, who subsequently subcontract that work out to multi-
national, multi-billion, foreign-owned conglomerates operating in the 
elevator industry. As much as 70-80% of contract value is performed by 
those conglomerates, the commenter argued.
    The commenter proposed that SBA consider, in addition to the 
Economic Census data, publicly available alternative industry data and 
industry expertise in determining the size standard for the elevator 
industry. Based on the industry data the commenter has access to, the 
commenter provided estimates of various industry factors that SBA 
evaluates in establishing and reviewing size standards, including the 
4-firm concentration ratio (70%) and Gini coefficient (0.90), arguing 
that these factors support a much higher size standard for the elevator 
industry. They also noted that generally the elevator industry has 
significant barriers to entry and higher average firm size due to 
industry dominance by the largest four firms. The companies that exceed 
the current size standard of the elevator-related industries cannot 
compete under full and open competition against the largest competitors 
that are more than 200 times larger than a small elevator company, the 
commenter argued.
SBA Response
    As stated elsewhere in this document, the Small Business Act 
requires the size standards to vary from industry to industry to the 
extent necessary to reflect the differing characteristics among the 
various industries. When a company operates in closely related multiple 
industries (such as NAICS 236220 and NAICS 239290), it is not uncommon 
for it to be considered small in some industries and other than small 
(``large'') in others. A good example is a company operating both in 
NAICS 541310, Architectural Services, and in NAICS 541330, Engineering 
Services. NAICS 541310 has a size standard of $12.5 million and NAICS 
541330 has a size standard of $25.5 million. Accordingly, the same 
company may qualify as small under NAICS 541330 but not under NAICS 
541310. Thus, the issue of the elevator industry is not unique.
    The SBA regulations allow small business general prime contractors 
to subcontract up to 85% of the value of work, excluding the cost of 
materials, to companies that are not similarly situated entities (see 
13 CFR 125.6(a)(3)). Similarly, SBA regulations allow small business 
specialty trade prime contractors to subcontract up to 75% of the value 
of work, excluding the cost of materials, to companies that are not 
similarly situated (see 13 CFR 125.6(a)(4)).
    SBA's regulations in 13 CFR 21.406(b) require contracting officers 
to designate an appropriate NAICS code (along with applicable size 
standard) that best describes the principal purpose of the product or 
service being acquired. If it is believed that the contracting 
officer's NAICS code designation or size standard is not appropriate, 
SBA's regulations in 13 CFR 121.1102 allow the interested parties to 
appeal that NAICS code designation with the SBA's Office of Hearings 
and Appeal (OHA). Procedures for appealing a NAICS code or size 
standard designation are set forth in 13 CFR 121.1103.
    Regarding the commenter's suggestion that SBA create a new NAICS 
code representing the elevator industry, SBA does not have authority to 
create or modify a NAICS code. In collaboration with the Statistical 
Agencies of the United States, Canada, and Mexico, every five years, 
the Economic Classification Policy Committee (ECPC) within the Office 
of Budget and Management (OMB) creates new NAICS codes or revise the 
existing codes. Any comment or supporting documentation for creating a 
new NAICS code for the elevator industry should be directed to the 
ECPC's comment and notice process for the quinquennial NAICS 
revisions.\9\
---------------------------------------------------------------------------

    \9\ NAICS Update Process Fact Sheet on the NAICS website at 
https://www.census.gov/naics/reference_files_tools/NAICS_Update_Process_Fact_Sheet.pdf provides tentative schedules for 
considerations of changes to NAICS for 2027.
---------------------------------------------------------------------------

    With respect to the suggestion to establish a 1,000-employee size 
standard for the new NAICS code for the elevator industry, historically 
SBA has been using receipts, not employees, as a measure of business 
size for construction-related industries. In industries where 
subcontracting is high, such as construction-related industries, SBA 
prefers to use receipts as a measure of size standards. When a prime 
contractor subcontracts out a portion of a contract, the value of 
contract being subcontracted out is counted toward prime's receipts, 
but subcontractor's

[[Page 74125]]

employees doing the work are not counted toward primes' employee count. 
Thus, an employee-based size standard may lead to excessive 
subcontracting in those industries.
    The Small Business Act limits the SBA's ability to establish a 
common size standard for related industries, such as elevator 
maintenance, repair, modernization, and construction industries. The 
statute permits establishing a common size standard by grouping all 
industries within the NAICS 4-digit level provided that the data 
supports the same size standard for each of those industries in the 
group, which is not the case for industries related to elevator 
maintenance, repair, modernization, and construction.
    As stated elsewhere in this document, the concerns regarding the 
size standards for specific industries are beyond the scope of the 
Revised Methodology. The Methodology merely provides an analytical 
framework for reviewing existing and calculating new size standards. 
SBA's actual decisions to change or modify size standards are 
implemented through rulemakings. SBA encourages the commenter to submit 
their concerns regarding the size standards for specific industries, 
including any relevant industry data and analysis, by commenting on the 
forthcoming proposed rules reviewing size standards for their 
industries.
    ITVAR NAICS 541519 (Footnote 18).
    An advocacy organization for small and mid-size companies submitted 
as comment the testimonies of two information technology value added 
resellers (ITVAR) firms provided to the House Small Business Committee 
Hearing on size standards, held on February 6, 2024.\10\ Both 
testimonies (commenters) outlined their success as a Federal ITVAR and 
challenges they face in competing on information technology (IT) 
procurement opportunities.
---------------------------------------------------------------------------

    \10\ Those testimonies are available in entirety at the 
following links: https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-MooreB-20230206.pdf; https://www.congress.gov/118/meeting/house/116800/witnesses/HHRG-118-SM00-Wstate-LambkeJ-20230206.pdf.
---------------------------------------------------------------------------

    The commenters maintained that small business ITVARs play an 
important role in meeting the Government IT procurement needs in three 
ways: (1) obtaining IT equipment and supporting services from a single 
source; (2) acquiring multiple multivendor IT products from a single 
acquisition; and (3) customizing computer hardware or software. They 
pointed out that ITVARs provide cost-effective IT solutions to the 
Government by serving as an intermediary between the Government and 
creators of IT hardware and software, usually known as the original 
equipment manufacturers (OEMs). Besides selling the IT hardware and 
software, ITVARs also provide the Government with beneficial value-
added services, including, but not limited to, configuration consulting 
and design, systems integration, installation of multi-vendor computer 
equipment, customization of hardware or software, training, product 
technical support, maintenance, and end user support, they added. The 
commenters have identified the following challenges small business 
ITVARs face in the Federal marketplace and potential solutions to 
address them. These are summarized below even though these issues are 
outside the scope of the Revised Methodology.
Challenges
    1. The changing landscape of the IT procurements.
    The commenters explained that, in 2003, SBA created a new 
subindustry category or ``exception'' for ITVARs under NAICS 541519, 
Other Computer and Related Services, with a size standard of 150 
employees (68 FR 74833; December 29, 2003).\11\ For this, SBA created a 
new footnote (Footnote 18), which provides a definition of an ITVAR and 
describes the circumstances under which a procurement could properly be 
classified under the ITVAR exception and its 150-employee size 
standard, the commenters noted. When SBA first established the ITVAR 
exception, IT procurement market was vastly different than it is today, 
they argued. The commenters contended that selling to the Government 
then was much simpler and required fewer employees than it does now. 
They claimed that today Federal customers need much more complex IT 
solutions that include artificial intelligence (AI), robotics, 
cybersecurity, and cloud computing. As the focus of Government spending 
shifts more and more towards innovation and meeting its burgeoning 
technology needs, small businesses, including small ITVARs, are 
providing the Government with IT more than ever before, the commenters 
noted. The current regulatory landscape includes a patchwork of rules 
and regulations specific to small businesses and the IT industry that 
have made it challenging, and in some cases impossible, for small 
business ITVARs to participate in the Federal market without 
potentially violating the law, they asserted.
---------------------------------------------------------------------------

    \11\ For Federal contracts that combine substantial services 
with the acquisition of computer hardware and software, in 2002, SBA 
proposed establishing a new ITVAR subindustry or ``exception'' 
category under NAICS 541519, Other Computer Related Services, with a 
size standard of 500 employees (67 FR 48419; July 24, 2002). SBA 
received a total of 291 comments, of which 276 or 95% opposed the 
proposed 500-employee size standard for the newly created ITVAR 
exception in support for a smaller size standard. In the final rule, 
SBA adopted 150 employees.
---------------------------------------------------------------------------

SBA Response
    The changing landscape with respect to IT procurements is not 
necessarily bad for the ITVAR contractors or the Government. With 
introduction of category management, strategic sourcing, and other 
initiatives in the Federal market, the changing Federal procurement 
landscape has touched most sectors and industries with a significant 
Federal spend. The changing IT landscape of the Federal market has led 
to improvement and modernization of how agencies purchase IT goods and 
services, resulting in creation of value, efficiency, and innovation of 
procurement activities, while reducing risks and costs. By adopting 
current best practices, agencies can secure cost savings and improve 
quality of products and services being acquired. SBA small business 
rules and regulations are intended to serve the interests of small 
businesses that need Federal assistance the most.
    2. 15-50% value-added services requirement.
    Footnote 18 requires an ITVAR classified under NAICS 541519 to 
provide multivendor hardware and software along with significant value-
added services, the commenters asserted. They stated that Footnote 18 
provides that an IT procurement classified under the ITVAR exception 
and its 150-employee size standard must consist of at least 15% and not 
more than 50% of these value-added services, as measured by the total 
contract price. However, much of the value-added services provided by 
ITVARs occur prior to contract award and/or are built into existing 
pricing and not separately charged, commenters contended. Commenters 
asserted that, under the current rule, measuring the percent of value-
added services as compared to the total contract price, the 15-50% 
value-added requirement is unrealistic and will increase the costs to 
the Government. They argued that ITVARs generally do not charge 
separately for value-added services whose costs are incorporated into 
the company's overhead costs. As such, the value-added services often 
do not account for 15% of the total contract price, they noted.

[[Page 74126]]

SBA Response
    Footnote 18 provides that if the contract consists of less than 15% 
of value-added services, then it must be classified under a 
manufacturing NAICS industry. If the contract consists of more than 50% 
of value-added services, then it must be classified under the NAICS 
industry that best describes the predominate service of the 
procurement. If it is believed that the NAICS code contracting officers 
designate to a solicitation is not correct, SBA regulations in 13 CFR 
121.1102 allow the interested parties to appeal the contracting 
officer's decision to SBA's Office of Hearings and Appeal (OHA).
    3. The nonmanufacturer rule (NMR) and waivers.
    The commenters noted that, under Footnote 18, an ITVAR contractor 
must comply with the NMR. They stated that this is a change to the 
regulation SBA made in 2016 (81 FR 4436; January 26, 2016). Prior to 
this, an ITVAR contractor was not subject to the NMR, they argued. The 
commenters maintained that specific to supply contracts, the NMR allows 
a small business to supply products it did not manufacture if certain 
requirements are met, including that the supplied products were 
manufactured by another small business. They stated that small 
businesses may supply products manufactured by any size business if the 
SBA grants a waiver of the NMR. In most cases, the Government requires 
the ITVARs to provide computer hardware and software manufactured or 
produced from large OEMs, they argued. Thus, applying the NMR to 
procurements of IT products presents several challenges for small 
business ITVARs and, in many cases, is inconsistent with what agencies 
specifically require in their solicitations, they contended. The 
commenters argued that while class waivers exist for some hardware, 
currently, there are no class waivers for software products. Thus, a 
small business ITVAR cannot participate in opportunities involving the 
purchase of commercial software manufactured by large businesses even 
where the Government specifically requires such software, they 
reasoned. Rather, small businesses can participate in such 
opportunities only when the contracting officer requests an individual 
waiver, the commenters claimed. Notably, it is not mandatory for the 
contracting officer to request an individual waiver, they noted. They 
contended that, in most cases, the contracting officer will choose not 
to seek a waiver, even if the acquisition is set up as a small business 
set-aside for product for which there is no small business 
manufacturer. They declared that this practice flies in the face of 
established rules and sets up unwary ITVAR contractors to violate the 
NMR (and, potentially, the False Claims Act) simply for following the 
requirements set forth by the Government.
SBA Response
    If a small business set-aside IT procurement classified under the 
ITVAR exception includes products for which there are no small 
businesses manufacturing the product being acquired, SBA regulations in 
13 CFR 121.406(b)(5) allow the contracting officers, and in some cases 
the public, to request a waiver of the NMR from SBA. There are two 
types of waivers of the NMR: class waivers and individual waivers. SBA 
grants a class waiver only upon its determination that no small 
business manufacturer or processor of the product or class of products 
is available to participate in the Federal procurement market. SBA 
issues an individual waiver if the Agency determines that no small 
business manufacturer or processor reasonably can be expected to offer 
a product meeting the specifications (including period for performance) 
required by a particular solicitation.\12\ The procedures for 
requesting and granting these waivers are set forth in 13 CFR 121.1204.
---------------------------------------------------------------------------

    \12\ SBA has granted several individual waivers for software 
products under NAICS 513210, Software Publishers.
---------------------------------------------------------------------------

    4. Inappropriate use of NAICS.
    The comments stated that the Government uses the NAICS codes to 
identify the purpose of a procurement and to identify the size standard 
a business must meet to qualify as small for that procurement. When 
issuing solicitations, contracting officers must designate a single 
NAICS code that best describes the principal purpose of the product or 
service being acquired, they attested. They argued that, often, an IT 
procurement may be a mixed procurement, involving both products and 
services. However, the contracting officer still must assign a single 
NAICS code according to the component that accounts for the greatest 
percentage of contract value, they asserted. The commenters argued that 
this causes problems for ITVARs that provide both products and 
services. ITVARS offer computer hardware or software and/or services 
that reasonably can be classified either under a supply or a service 
NAICS code, they declared. They argued that the existing NAICS codes 
are not appropriate for small business ITVARs. Establishments that 
primarily provide services are classified under a service NAICS code, 
they added. The commenters maintained that small business ITVARs 
primarily provide computer hardware, software, and related products 
(supplies) along with some services that cannot be classified under the 
service NAICS codes. Likewise, the supply codes cover establishments 
that manufacture a specific product, they argued. Commenters contended 
that since products ITVARs provide often are manufactured by other 
companies, small business ITVARs do not fit neatly under the supply 
NAICS codes either.
SBA Response
    SBA's regulations in 13 CFR 121.402(b) require contracting officers 
to designate an appropriate NAICS code that best describes the 
principal purpose of the product or service being acquired. If it is 
believed that the contracting officer's NAICS code designation is not 
appropriate, SBA's regulations in 13 CFR 121.1103 allow the interested 
parties to appeal that NAICS code designation to the SBA's Office of 
Hearings and Appeal (OHA). As stated elsewhere in this document, the 
nonmanufacturer rule allows contractors to supply products that they 
did not manufacture or produce.
    Recognizing that the ITVAR exception has led to misuse, 
inconsistency, and confusion with respect to designation of NAICS codes 
for ITVAR solicitations by contracting officers, in 2014, as part of 
the first 5-year review of size standards under the Jobs Act (79 FR 
53646; September 10, 2014), SBA proposed eliminating the ITVAR 
exception (and Footnote 18) to address those issues. By definition, 
ITVAR contracts account for 15-50% of value-added services and 50-85% 
of computer hardware and software (supplies). Thus, by definition, the 
ITVAR exception is for contracts that are primarily for supplies, with 
some services. As stated in the 2014 proposed rule, if the ITVAR 
exception is eliminated, all ITVAR contracts would be reclassified 
under the employee-based size standard for the manufacturing industries 
or under the 500-employee NMR size standard. IT procurements with more 
than 50% of services will be appropriately classified under services 
NAICS codes. However, in response to overwhelming comments against 
eliminating the ITVAR exception, in the final rule, SBA retained the 
ITVAR exception along with 150 employees, but subjected the supply 
component of the ITVA contracts to manufacturing requirements

[[Page 74127]]

and the NMR (81 FR 4436; January 26, 2016).
    5. Increased compliance requirements.
    With changes in IT procurement landscape, the burden placed on 
ITVARs has increased drastically as well, the commenters explained. 
They argued that numerous employees are needed for compliance. ITVARs 
are required to obtain a wider breadth of knowledge with multiple OEMs 
than an IT service company would, they contended. They claimed that 
small business ITVARs are not exempt from these requirements from the 
Government nor from the OEMs. They held that to stay under the 150-
employee size standard, small business ITVARs must sacrifice hiring at 
the expense of obtaining and maintaining Government mandated 
certifications, or forgo obtaining required certifications with the 
OEMs, which hurts the portfolio of products they are able to offer and 
also negatively affects their pricing discounts and profitability. With 
an increased focus on secure supply chain and numerous certification 
requirements (such as International Organization for Standardization 
(ISO) certifications, cybersecurity maturity model certification 
(CMMC), supply chain risk management, ITAR, security clearances, 
affirmative action and others), ITVARs must now hire employees to 
manage compliance, the commenters contended. They argued that OEM 
partners also require ITVARs to hold advanced certifications to be 
authorized to sell their products. Government customers also require 
advanced OEM certifications to bid on certain procurements, they added. 
It is often difficult for small business ITVARs to navigate these 
issues particularly, where the Government has set aside a procurement 
based on an inappropriate NAICS code, the commenters noted.
SBA Response
    Maintaining compliance is not unique to delivering IT goods and 
services to Government agencies under the ITVAR exception. Contractors 
providing goods and services in other industries are also required to 
ensure that they comply with applicable existing law and regulations. 
Larger small businesses are likely to maintain in-house specialized 
workforce dedicated to carry out compliance work, while smaller small 
business are likely to hire external consultants and attorneys. 
Achieving compliance with regulations, law and other requirements would 
reduce the ITVAR contractors' risks of violating law and facing fines, 
debarment, or other penalties. Compliance with applicable law and 
regulations would also provide confidence to the Federal clients, 
thereby increasing the likelihood of wining Federal contracts. 
Requirements for increased knowledge, qualifications/certifications, 
and capabilities to participate in the delivery of IT products can not 
only enhance the quality of IT goods and services being procured by the 
Government by ensuring that they meet its specifications and standards, 
but also enhance contractors' ability to meet Government needs.
    6. Industry consolidation and size standard.
    The commenters stated that there is increased consolidation and 
acquisitions in the ITVAR industry. It is common for ITVARs, once they 
exceed 150 employees, to sell their businesses, they argued. The 
commenters contended that these ITVARs, who usually have years of 
experience in Government contracting and proven capabilities, are 
purchased by larger industry competitors or private equity firms. There 
has been a mass exodus of firms from the industry once they exceed the 
size standard, they asserted. They argued that this hurts the Federal 
agencies as they lose small businesses and qualified suppliers who are 
often replaced with less qualified and less capable suppliers. The 
unicorn in the ITVAR industry has become those companies with between 
151 employees and 500 employees, they noted. They claimed that to go 
from successfully competing as a small business to competing with large 
companies, like CDW and IBM, is an improbable endeavor for a small 
ITVAR. The result is an erosion of the supplier base that has valuably 
served the Government, the commenters argued. Not only does the 
Government suffer under this scenario, but so do the employees and the 
communities where these businesses are located as the acquiring 
companies or private equity firms are headquartered in larger 
metropolitan areas, the commenters contended. They pointed out that 
increasing the employee size limit to 500 employees would insure there 
are ample small businesses that are qualified to meet the increasing 
demands of today's Government customers.
SBA Response
    The commentary that small businesses, once they exceed their size 
standards, are acquired by large corporations or private equity firms 
is not unique to ITVAR firms. SBA frequently receives such concerns 
from businesses in other industries as well. SBA believes that such 
concerns would remain regardless of how high the size standards are. 
For example, SBA's recent increases to size standards have not 
alleviated these concerns. SBA increased 604 size standards under the 
first 5-year review of size standards and 436 size standards under the 
second 5-year review of size standards. Additionally, SBA has 
periodically increased its monetary-based size standards for inflation. 
SBA also has increased the averaging periods for calculating annual 
receipts for size standards from 3 years to 5 years and for calculating 
the average number of employees for size standards from 12 months to 24 
months, thereby extending the runway for small businesses to 
successfully transition from small business to mid-size or large 
business status in the Federal marketplace. With respect to the 
commenter's suggestion to increase the ITVAR size standard to 500 
employees, SBA will review that size standard as part of the 
forthcoming third 5-year review of size standards under the Jobs Act 
and determine if it needs to be revised. The commenters are advised to 
submit their comments when SBA issues a proposed rule with the results 
of its analysis.
    7. Limitations on subcontracting rule.
    The commenters maintained that, for both supplies and services, the 
limitations on subcontracting rule (``LOSR'') requires that a small 
business not subcontract more than 50% of the prime contract amount to 
businesses that are not ``similarly situated.'' In contracts for mixed 
procurements (i.e., both supplies and services), the LOSR applies only 
to subcontracts that correspond to the principal purpose of the prime 
contract, they argued. The commenters contended that the LOSR is 
problematic for small business ITVARs that resell to the end-user IT 
products (e.g., hardware, computers, etc.) and/or services (e.g., 
cloud, hardware/software maintenance, etc.) that mostly originate from 
other companies. Often, the products and services the Government 
requires under the ITVAR solicitation are provided only by large 
companies, and easily exceed 50% of the total contract amount, the 
commenters reasoned. Thus, the commenters argued, the LOSR has the 
effect of eliminating small business ITVAR participation in many 
Federal acquisitions for IT products and services although they are 
set-aside for small businesses.
SBA Response
    In accordance with SBA's regulations in 13 CFR 125.6(a)(2), 
procurements of supplies from a nonmanufacturer of such supplies are 
exempt from the

[[Page 74128]]

LOSR. In other words, the NMR supersedes the LOSR. In the case of a 
contract for supplies from a nonmanufacturer, a small business will 
comply with all requirements at 13 CFR 121.406(b)(1) to qualify as a 
nonmanufacturer, including supplying the product of a domestic small 
business manufacturer or processor, unless a waiver is granted pursuant 
to SBA's regulations in 13 CFR 121.406(b)(5). If a waiver is granted, 
the offeror is not required to comply with the NMR requirements.
    8. Potential liability for small businesses.
    The commenters contended that the Government regularly issues 
solicitations under inappropriate NAICS codes, thereby inviting small 
business ITVARs to violate the Small Business Act and exposing them to 
risk of fines, debarment, or other penalties. There is little 
compliance oversight by the Government with respect to NAICS codes, 
they claimed. Rather, the onus has shifted to small business ITVARs to 
use scarce time and resources to police Government agencies via NAICS 
code protests, the commenters stated. They held that relying on 
protests to check this frequent misuse is unrealistic, costly, and 
unfair for small business ITVARs. Another issue facing small business 
ITVARs is misapplication of the ITVAR code, for example, as when the 
contract includes services that account for less than 15% of the total 
contract price, the commenters argued. They mentioned that, in this 
situation, small business ITVARs can choose to bid, knowing they will 
not provide value-added services that account for 15-50% of the total 
contract price as required by the ITVAR exception, and thus potentially 
setting themselves up for an allegation that they have violated the law 
or made a false certification. Or, the small business can forgo the 
opportunity altogether, while less risk-averse competitors are awarded 
the work, the commenters argued. Where a small business ITVAR 
contractor is not compliant with the SBA regulations, it is susceptible 
to size protests, potential suspension or debarment, or False Claims 
Act liability, they pointed out. Thus, simply by submitting a proposal 
where the business cannot comply with the NMR, or with the 15-50% 
service requirement under the ITVAR exception, a small business 
contractor could potentially expose itself to False Claims Act 
liability, suspension or debarment, a size protest by a competitor, 
contract termination, and loss of business, the commenters declared.
SBA Response
    Pursuant to SBA's regulations in 13 CFR 121.402(b), Federal 
agencies are required to select a single NAICS code for an acquisition 
that best describes the principal purpose of the service or product 
being acquired. If businesses believe that the NAICS code selected by 
the contracting officer for the contract is inappropriate, pursuant to 
13 CFR 121.1103, they can file a NAICS code appeal with the SBA's 
Office of Hearings and Appeals (OHA). However, because contractors do 
not have affirmative responsibility for ensuring that the NAICS code 
selected by a contracting officer is appropriate, they are not liable 
for bidding on or performing solicitations for which the NAICS code 
selected by the contracting officer is inappropriate. The determination 
on whether an ITVAR contract meets the 15-50% service requirement is 
made prior to the award and does not become the terms and conditions of 
the contract. Accordingly, small business ITVAR contractors may not be 
liable even though value-added services account for less than 15% or 
more than 50% of the contract value. However, when the NMR requirement 
falls under the terms and conditions of the contract, small ITVARs are 
bound to comply with the NMR unless there is a waiver.
    9. Software NAICS 513210 (Footnote 15).
    The commenters maintained that, in 2016, SBA promulgated a new rule 
relating to NAICS 513210, Software Publishers, providing that 
unmodified, commercially available software supplied in procurements 
under that NAICS code is an item of supply rather than a service, thus 
subjecting these items to the NMR (81 FR 34243; May 31, 2016). The 
commenters stated that, for this, the SBA created a new footnote 
(Footnote 15), which explains that NAICS 513210 is the proper NAICS 
code to use when the Government is purchasing COTS (``commercial-of-
the-shelf'') software, which is eligible for a waiver of the NMR. The 
Characterization of COTS software as a product subject to the NMR 
presents the added complication of seemingly conflicting size standards 
applicable to these procurements, the commenters reasoned. NAICS 
513210, a services code, has a revenue-based size standard of $47 
million, while a company may also qualify as small under the NMR based 
on a size standard of 500 employees, they noted.
    The commenters pointed out that one consequence of changing the 
classification for COTS software to a supply was that the NMR then 
became applicable to procurements for this type of software, and 
waivers then could be sought. The 2016 rule amended the SBA's 
regulations that SBA may grant an individual waiver for the procurement 
of software, provided that the software meets certain conditions, the 
commenters noted. The commenters held that individual waivers may be 
requested by contracting officers and the public can request that SBA 
issue class waivers for software items. However, they argued that, in 
practice, contracting officers have been reluctant to request a 
contract specific waiver, and, to date, no class waivers for software 
have been granted.
    Commenters contended that a class waiver for the Footnote 15 
portion of NAICS 513210 would be appropriate for resolving many of the 
issues facing small business ITVARs for four reasons: (1) the COTS 
software procured under NAICS 513210 is overwhelmingly manufactured by 
large businesses that it obviates the purpose of the NMR; (2) the small 
business set-asides are almost universally in violation of the NMR; (3) 
these violations are almost forced by the Government's dual need for 
both large business software and small business credit, leading to 
improper solicitations; and (4) this situation invites small businesses 
to expose themselves to the risk of misrepresenting their size status.
    The commenters pointed out that the Government regularly posts 
solicitations for acquisitions of COTS software manufactured by large 
businesses that are classified under NAICS 513210 and set-aside for 
small businesses. The NMR applies to these solicitations unless the 
contracting officer has obtained a waiver from SBA, the commenters 
argued. If a waiver is granted, the solicitation can be set-aside for 
small businesses, and the small business awardee can provide an end-
product made by any size manufacturer, they added. In practice, waivers 
are rarely obtained, the commenters argued. They asserted that if the 
solicitations do not include a waiver of the NMR, any small business 
awardee must provide an end-product made by a small business 
manufacturer. In many instances, this is not possible because the 
Government often specifically requests items manufactured exclusively 
by large businesses, or because certain products are not manufactured 
by small businesses, the commenters argued. They contended that, 
without a waiver, any small business awardee that provides the required 
COTS software (manufactured by a large business) under a set-aside is 
violating the Small Business Act, opening itself to liability

[[Page 74129]]

under the False Claims Act for making false statements and 
certifications to the Government, and subjecting itself to a host of 
other negative consequences--all at the behest of the Government 
agency.
SBA Response
    SBA grants a class waiver of the NMR for a class of products or 
supplies only upon the determination that no small business 
manufacturer or producer is available in the Federal market for such 
products or supplies. The procedures for requesting and granting class 
waivers are contained in 13 CFR 121.1204. Any interested person, 
business, association, or Federal agency may submit a request for a 
waiver for a particular class of products. Requests should be addressed 
to the Director, Office of Government Contracting, Small Business 
Administration, 409 3rd Street SW, Washington, DC 20416. Requests for a 
waiver of a class of products should include a statement of the class 
of products to be waived, the applicable NAICS code, and detailed 
information on the efforts made to identify small business 
manufacturers or processors for the class of products. If SBA decides 
that there are small business manufacturers or processors in the 
Federal procurement market, it will deny the request for waiver, issue 
notice of the denial, and provide the names, addresses, and telephone 
numbers of the sources found. If SBA does not initially confirm the 
existence of small business manufacturers or processors in the Federal 
market, it will: (i) publish notices in the Commerce Business Daily and 
the Federal Register seeking information on small business 
manufacturers or processors, announcing a notice of intent to waive the 
NMR for that class of products and affording the public a 15-day 
comment period; and (ii) if no small business sources are identified, 
publish a notice in the Federal Register stating that no small business 
sources were found and that a waiver of the NMR for that class of 
products has been granted. SBA my expedite the procedure for issuing a 
class waiver under emergency situations (see 13 CFR 121.1204(5)). SBA 
has granted several individual waivers for the COTS software under 
NAICS 513210. If commenters feel that SBA can reasonably issue a class 
waiver for this code, then an interested party should request one and 
provide the required documentation.
Proposed Solutions
    The commenters declared that the current system for classifying and 
executing procurements involving ITVARs has serious flaws that should 
be addressed. They stated that any comprehensive solution must: (1) 
create a new industry by recognizing what ITVARs actually do (i.e., the 
type and mix of services and products they provide); (2) capture and 
account for how services currently are billed to the Government, and 
eliminate the 15-50% value-added requirement; (3) provide a realistic 
size standard that is not over- or under-inclusive; and (4) address the 
NMR requirements for COTS procurements.
    1. Creation of the new NAICS code.
    The commenters pointed out that, while there are a number of 
possible solutions, the most viable and sensical solution is to create 
a new NAICS code that accurately captures the core competency of the 
ITVAR, accompanied by creation of an appropriate SBA size standard and 
elimination of the ITVAR exception at Footnote 18. They contended that 
the new code should focus on the ITVAR's role as a consultant that 
provides pre-sales engineering and subject matter expertise on a 
variety of software and hardware products. Ideally, the Economic 
Classification Policy Committee (ECPC) within OMB will create a new, 
stand-alone NAICS code for ITVARs, they noted. Once established, the 
SBA should then revise its current size standard accordingly and 
eliminate Footnote 18 under NAICS 541519, the commenters added.
SBA Response
    In 2014, because of inconsistencies, confusion and misuse 
surrounding the application of NAICS codes for ITVAR contracts, SBA 
proposed to eliminate the ITVAR exception, along with its 150-employee 
size standard and the accompanying footnote (Footnote 18) under NAICS 
541519 (79 FR 53646; September 10, 2014). SBA received a total of 168 
comments, of which 163 opposed the SBA's proposal. In response, SBA 
retained the 150-employee size standard and Footnote 18, while 
subjecting the supplies component of an ITVAR contract to the 
manufacturing performance requirements and the NMR.
    Any documentation and information in support of the creation of a 
new NAICS for the ITVAR industry should be directed to the ECPC within 
OMB. As stated elsewhere in this document, in collaboration with 
Statistical Agencies from the U.S., Mexico and Canada, the ECPC, every 
5 years, creates new NAICS codes or revises the existing ones. The 
NAICS website has established a factsheet regarding the time schedules 
for the 2027 NAICS revisions.
    2. Elimination of the 15-50% service requirement.
    The commenters contended that the SBA's size standard for the new 
NAICS code must not include a service requirement that is based on a 
percent of the total contract price, but it should be based on value-
added services provided by a typical ITVAR. The commenters noted that 
the current ITVAR 15-50% services requirement ignores the reality in 
following ways: (1) the fixed cost of the component far exceeds the 
cost of the services and implementation of equipment, and (2) the 
provided services generally are not separately billed. The commenters 
stated that ITVARs provide valuable services to the Government, but the 
costs of those services are included in overhead costs, covered by 
narrow margins on the IT products, and not separately charged. 
Therefore, the current requirement that services account for 15-50% of 
the total contract price is unattainable and should be eliminated under 
the new size standard, the commenters argued.
SBA Response
    The 15-50% service requirement provides that if the contract 
consists of less than 15% of value-added services, then it must be 
classified under a manufacturing NAICS industry. If the contract 
consists of more than 50% of value-added services, then it must be 
classified under the NAICS industry that best describes the predominate 
service of the procurement. SBA is concerned that eliminating the 15-
50% requirement would lead the contracting officers to improperly apply 
the ITVAR exception, instead of the manufacturing NAICS code, to IT 
procurements where the value-added services account for less than 15% 
of the contract value. Similarly, the elimination of the 15-50% 
requirement would encourage the contracting officers to use the ITVAR 
exception, at the expense of small business services firms, for IT 
acquisitions that account for more than 50% of value-added services.
    3. Revision to the size standard.
    As soon as practicable, after the new NAICS code is established, 
SBA should revise its size standard to account for the new NAICS code 
and institute an appropriate employee-based size standard, the 
commenters argued. Recognizing that ITVARs typically operate on low 
margins even though their annual receipts may be high, the size 
standard should be based on employee count rather than annual revenue, 
the commenters reasoned. The commenters attested that a reasonable

[[Page 74130]]

size standard for the new code is 500 employees.
SBA Response
    It should be noted that SBA proposed a 500-employee size standard 
when it first created the ITVAR exception (67 FR 48419; July 24, 2002). 
As discussed in detail in the final rule (68 FR 74833; December 29, 
2003), of a total of 291 comments received, 276 or 95% of comments 
opposed the proposed 500-employee size standard for the ITVAR exception 
in support of a smaller size standard. Commenters argued that 
businesses with 500 employees are not small in the ITVAR industry, and 
that smaller IT businesses are not competitive against businesses with 
hundreds of employees. The commenters contented that, under the 
proposed 500-employee size standard, Federal agencies are more likely 
to award ITVAR contracts to the larger small businesses at the expense 
of much smaller businesses. Several comments considered a 500-employee 
ITVAR firm to be dominant in this field, and therefore does not meet 
the Small Business Act's statutory definition of a small business which 
excludes dominant businesses as small. Finally, the commenters argued 
that a vast majority of firms engaged in the ITVAR industry are much 
smaller than 500 employees. Commenters to the 2014 proposed rule (79 FR 
53646; September 10, 2014) that proposed eliminating the ITVAR 
exception (along with Footnote 18) validated the above concerns.
    4. Elimination of the NMR requirements.
    With respect to qualifying as a small business under the new NAICS 
code, SBA should acknowledge that the NMR is explicitly inapplicable, 
the commenters argued. Because ITVARs, by definition, do not 
manufacture the products they resell, it is nonsensical to require them 
to comply with the NMR--particularly where solicitations overwhelmingly 
seek COTS items manufactured by large businesses, the commenters held. 
They maintained that both the ITVAR code (NAICS 541519, Footnote 18) 
and the COTS code (NAICS 513210, Footnote 15) require compliance with 
the NMR, but allow for waivers of the NMR. Rather than eliminating the 
NMR with respect to procurements using these codes, SBA opted to put 
the onus on agencies to seek waivers, they noted. In practice, this has 
not been a viable solution, as shown by how ineffective and 
underutilized the waiver has been to date, the commenter argued. 
Contracting officers have been reluctant to request contract specific 
waivers and, to date, no class waivers for software have been granted, 
they added.
SBA Response
    Considering the rapid pace of development in the IT industry, SBA 
believes that it is not unreasonable to assume that there will be new 
products purchased by the Federal Government using the ITVAR exception 
in the future that will be manufactured by small businesses. Thus, by 
eliminating the NMR for the ITVAR exception, SBA could disadvantage 
small firms who are currently offering, or plan to offer products to 
the Government. SBA also believes it would be inconsistent with the 
intent of the Small Business Act if ITVAR resellers could provide the 
supplies produced primarily by large OEMs, or other large 
manufacturers, without the NMR. SBA is concerned that without the 
compliance with the NMR, the ITVAR exception may allow small business 
ITVARs to simply serve as ``pass throughs'' for large OEMs and other 
large manufacturers. While SBA recognizes that the NMR may work better 
for some products than for others, it strongly believes that the rule 
must apply to all supply contracts equally. Thus, like all other 
products and supplies, the nonmanufacturer rule must also apply to IT 
products, including those purchased through the ITVAR exception.
    5. Blanket waivers.
    The commenters stated that a separate work-around involves 
obtaining waivers. One way to allow small businesses to supply software 
manufactured by large corporations is to secure an individual waiver 
issued for a vehicle that covers a full array of IT orders of a 
Government department, the commenters contended. They noted that, in 
2020, the Department of Homeland Security (DHS) obtained an individual 
waiver from SBA for all the products and services to be procured under 
the FirstSource III. Under FirstSource III, any commercial IT product 
would be available, including products manufactured by large companies, 
they added. The commenters pointed out that, notably, FirstSource III 
will have two NAICS codes, NAICS 541519 (ITVAR) and NAICS 513210 
(Software Publishers). To resolve the NMR issues, DHS is pursuing an 
individual contract level NMR waiver for FirstSource III, the 
commenters added. If SBA approves the wavier, there would be no need 
for individual waivers for each order under FirstSource III, the 
commenters reasoned. They attested that DHS's attempt to secure a 
blanket waiver for the FirstSource III contract signals the 
Government's recognition of the need to change the rules to adapt to 
the evolving IT landscape. The commenters argued that a broader change 
is warranted for other types of IT procurements, particularly for those 
involving small business ITVARs.
SBA Response
    As explained above, SBA's regulations in 13 CFR 121.1204(a) allow 
Federal agencies to request for class waivers of the NMR from SBA if 
they, based on market research, demonstrate that there are not small 
businesses that manufacture or produce a class of IT hardware and 
software. For example, in 2020, SBA granted a class waiver of the NMR 
for commercially available off-the-shelf laptops and tablet computers 
under NAICS 334111, Electronic Computer Manufacturing (85 FR 13692; 
March 9, 2020). Procedures for requesting individual waivers are laid 
out in 13 CFR 121.1204(b). SBA has granted several individual waivers 
for the COTS software under NAICS 513210 and computer hardware and 
software under NAICS 541519.

D. Public Forums

    As mandated by section 1344 of the Jobs Act, SBA is required to 
hold not less than two public forums during its quinquennial review of 
size standards. SBA held two virtual public forums on size standards to 
update the public on the status of the ongoing five-year reviews of 
size standards under the Jobs Act and to consider public feedback on 
changes contained in the Revised Methodology. The two virtual public 
forums were held on January 23, 2024, and on January 25, 2024. Over the 
course of the two days, of 44 total participants, SBA received 
testimony from one commenter, mostly relating to the SBA's approach to 
evaluating the size standard for the ERS exception under NAICS 562910, 
Remediation Services. The comment received during the virtual public 
forums is included in the count of comments above.
    The comment expressed general support for the SBA's Revised 
Methodology and its data-driven approach to size standards. The 
commenter argued, unlike other `exceptions'' that are NAICS subindustry 
categories, the ERS exception is a superindustry category, because it 
consists of activities from several different NAICS industries. The 
commenter expressed concern over SBA's approach to creating the ERS 
industry by trimming the largest environmental companies for which the 
ERS work is not a primary source of their total revenues. The commenter

[[Page 74131]]

argued that large competitors in the ERS industry have a serious 
advantage over smaller businesses in terms of winning and executing 
work, even where only a small portion of their total revenue comes from 
ERS work. Large firms can leverage their vast resources, extensive 
experiences and economies of scale that give them a tremendous 
competitive advantage over a small business making roughly similar 
revenue. Thus, SBA should not trim such companies, the commenter noted. 
If SBA believes that trimming is necessary, it should provide a list of 
companies that were trimmed so that the public can comment on its 
analysis, the commenter added. The commenter also urged SBA to let the 
data drive the results rather than policies. The commenter also 
submitted a more detailed comment to www.regulations.gov, which has 
been summarized above.
    SBA response: SBA has responded to the ERS concern above.

E. Conclusion

    As discussed above, SBA proposed two changes to the Methodology: 
(1) adoption of the disparity ratio approach to account for the small 
business participation in the Federal market; and (2) use of the FPDS-
NG and SAM data to calculate the 20th percentile and 80th percentile 
values of industry factors to evaluate the size standards at the 
subindustry levels, usually known as ``exceptions.''
    SBA received four comments supporting the adoption of the disparity 
ratio approach to measure small business participation in the Federal 
market. SBA received three comments addressing the second issue, with 
one supporting the SBA's proposal to use FPDS-NG and SAM data to derive 
the 20th percentile and 80th percentile values of industry factors to 
evaluate exception size standards and two opposing it. As stated 
elsewhere, the data from the Census Bureau's Economic Census tabulation 
are limited to the six-digit NAICS industry level and therefore do not 
provide information on economic characteristics of firms at the 
subindustry level. Thus, SBA uses the FPDS-NG and SAM data to derive 
the industry factors for exceptions. Therefore, to be consistent, SBA 
is adopting FPDS-NG and SAM data to obtain the 20th percentile and 80th 
percentile values of industry factors for evaluating size standards for 
the NAICS exceptions, instead of using the percentiles from the 
Economic Census. As such, SBA is adopting both proposed changes in the 
Revised Methodology.
    Several commenters submitted comments pertaining to size standards 
for specific industries, including the ITVAR exception to NAICS 541519, 
the ERS exception to 562910, Software Publishers (NAICS 513210), and a 
few other industries. Comments pertaining to specific size standards 
are beyond the scope of the Methodology. Those commenters have been 
advised to submit their comments when SBA issues proposed rules as part 
of the third 5-year review of size standards under the Small Business 
Jobs Act of 2010.

Isabella Casillas Guzman,
Administrator.
[FR Doc. 2024-20228 Filed 9-11-24; 8:45 am]
BILLING CODE 8026-09-P


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