Size Standards: Back to the Drawing Board The Small Business Administration scrapped its proposed size standards in the face of a firestorm of opposition from business owners and lobbyists and some members of Congress. “We are here to serve those small business owners, and we take their concerns very seriously,” said Allegra McCullough, associate deputy administrator for government contracting. ”That is why we are going to step back and study this rule further. There is no doubt that our current system of size standards is in need of simplification, but we want to make absolutely sure that we do it in the right way.” On March 19, SBA proposed new standards based on the number of employees rather than a company’s revenue, with limits ranging from 50 employees to 1,500, depending on the industry. The rule would have set ceilings on revenue as well as employment in 31 industries, including construction and many services; to be eligible for federal small business programs, a company would have to stay below both the employment and receipts limits. Many small business organizations had raised strong objections to the proposal and some members of Congress were moving to block the rule by legislation, said Cathy Garman, senior vice president of the Contract Services Association of America. She spoke June 30 at a conference sponsored by the Washington law firm Piliero, Mazza and Pargament. In withdrawing the proposed rule July 1, SBA said it had received more than 3,700 comments. “Although many of those comments support aspects of the proposal, a number have raised concerns about SBA’s methodology for developing the proposed size standards, the impact the proposed size standards will have on existing small businesses, the determination of the employee size of a business, and SBA’s proposed overall approach to simplifying the size standards,” the agency said in its Federal Register notice. “Further review of these issues may result in substantive changes from the proposal.” SBA said it would issue an advance notice of proposed rulemaking and would seek another round of public comments before presenting a new proposal. The agency also plans public meetings across the country to hear the views of business owners, said Seth Becker, deputy communications director. “Everything is on the table,” Becker added, including the question of whether to convert to employment-based standards. The Defense Department has pushed for the conversion, saying its contracts are so large that a company can outgrow the current dollar-based standards by winning a single award. Business owners and advocates raised several major complaints about the proposed rule. By establishing limits on employment, “the SBA is encouraging small businesses to not hire new employees, at a time when the Administration is trying to create jobs and expand the economy,” the Contract Services Association said in a comment that was echoed by many others. SBA estimated that about 34,000 companies would lose eligibility for small business programs under the proposed standards, while about 35,000 would gain eligibility, for a net gain of more than 1,000. Several commenters protested that the agency had not taken into account the potentially devastating impact on those firms that were suddenly declared “large.” “It would be arbitrary and unfair to implement these regulations immediately without a grand-fathering period,” Washington lawyer Pamela Mazza wrote. In addition, SBA’s independent chief counsel for advocacy said, “Companies considered large by current SBA standards will become ‘small’ under SBA’s proposal. The effect of this may be to crowd out existing small businesses.” Many advocates objected to the proposed requirement that companies calculate their average employment for the previous 12 months every time they bid on a contract. Under current standards, companies use a three-year average of revenues to determine their small business status. Commenters said the proposed rule would require burdensome paperwork and could create a “yo-yo effect,” with a company qualifying as small one month, but not the next. Commenters also objected to the proposal to count part-time employees the same as full-timers. Many questioned SBA’s methodology in converting the current revenue-based standards to employment-based ones. SBA said it analyzed each industry to determine the average receipts per employee for all companies in the industry. However, it included both large and small businesses in its analysis. For example, Steve Denlinger, CEO of the Latin American Management Association, said SBA calculated that firms in the computer systems design field generated average revenues of $150,000 per employee. He said small business owners in that industry told him the true figure was about half as much. SBA relied on the Census Bureau’s 1997 business census in making its calculations. Some commenters said it should have waited until the 2002 figures were released. One provision of the proposed rule received favorable reviews from the affected industry: SBA proposed to reduce the nonmanufacturer size standard, which covers wholesale distributors, from 500 employees to 100. Industry representatives said that would level the playing field because the vast majority of wholesalers who have fewer than 100 employees would no long have to compete with much larger firms. Democratic presidential candidate John Kerry, ranking minority member of the Senate Small Business Committee, was among those calling on SBA to withdraw its proposal. The changes “could have severe, far-reaching, unintended consequences on small businesses and their local communities,” he wrote to Administrator Hector Barreto. In announcing the proposal in March, SBA said its purpose was to simplify size standards by reducing the number of different standards from 37 to 10. The agency also said it was striving to achieve a neutral impact on small businesses. Many commenters said the proposed rule satisfied neither objective.