SBA Proposes Changes to Small Business Size Standards for NAICS Sectors 22, “Utilities,” and 23, “Construction.”
July 30, 2012
By: Eric Whytsell
The U.S. Small Business Administration (“SBA”) recently issued one Proposed Rule seeking to revise the small business size standards for 9 industries in NAICS Sector 22, “Utilities,” Small Business Size Standards: Utilities, 77 Fed. Reg. 42,441 (July 19, 2012), and another proposing the revision of size standards for 1 industry and 1 sub-industry in NAICS Sector 22, “Construction,” Small Business Size Standards: Construction, 77 Fed. Reg. 42,197 (July 18, 2012). The proposed adjustments relating to the Construction sector are very modest and unlikely to have significant impact. But those proposed for the Utilities sector include increased size standards for 3 industries and the adoption of employee based size standards in the place of the current million megawatt hours (MWh) standards for 6 others.
Comments on both proposed rules are due on September 17, 2012.
The proposed size standard increases promise to enable formerly small companies to once again qualify and compete as small businesses for new procurement opportunities in these industries. If adopted, they also will expand the pool of qualified small businesses with which large companies can contract under their small business subcontracting plans. And businesses working in the Utilities sector industries impacted by the proposed switch to employee based standards will have to learn an entirely new approach to determining size. It therefore will behoove all businesses, both large and small, involved with these industries, to familiarize themselves with these proposed changes to the size standards and develop and timely submit comments if they wish to help shape the SBA’s decision on final rules for these sectors.
As previously noted in articles here and here relating to size standards, SBA’s size standards are set forth in 13 C.F.R. Part 121. Starting in 2007, SBA began a comprehensive review of its size standards. This effort has taken on increased impetus in view of the mandate in the Small Business Jobs Act of 2010, Pub. L. No. 111-240, signed September 27, 2010, directing SBA to conduct a detailed review of all size standards and to make appropriate adjustments to reflect market conditions. SBA is now required to conduct a detailed review of at least one-third of all size standards during every 18-month period, and to do a complete review of all size standards no less frequently than every five years. The proposed rules for Sectors 22 and 23 are part of that ongoing process.
Applying its “Size Standard Methodology,” SBA calculated new, higher size standards for the three non-electric industry NAICS Codes in Sector 22. As a result, it proposes to raise NAICS Code 221310 (Water Supply and Irrigation Systems) from $7.0M to $25.5M, NAICS Code 221320 (Sewage Treatment Facilities) from $7.0M to $19.0M, and NAICS code 221330 (Steam and Air-Conditioning Supply) from $12.5M to $14.0M. SBA conducted a more extensive evaluation of the Electric Utilities industries (NAICS Codes 221111 to 221122) and its approach to their size standards. Currently, in order to be considered “small” within these industries, firms, including their affiliates, must be primarily engaged in the generation, transmission and/or distribution of electric energy, see Footnote 1 in 13 CFR § 121.201, and its total electric output for the preceding fiscal year must not exceed 4 MWh. In preparing the proposed rule, SBA considered three options for changing the size standard: (1) increasing the current MWh based size standard from 4 million MWh to 8 million MWh and modifying Footnote 1; (2) adding an employee based size standard of 500 employees along with an 8 million MWh size standard and eliminating Footnote 1; and (3) replacing the current 4 million MWh size standard with an employee based size standard of 500 employees and eliminating Footnote 1. After extensive discussion, SBA announced its strong preference for the third option, which it stated would avoid the complications of trying to apply Footnote 1 while taking advantage of the simpler, more consistent, and more appropriate employee based approach. Click here to see SBA’s Table 3, summarizing the resulting proposed size standards for NAICS Sector 22.
The proposed changes to size standards in the Sector 23, “Construction,” are not nearly as extensive, although they would been if based solely on the numbers. Using its Size Standard Methodology, SBA calculated standards for each NAICS Code in the Sector and found that many of them were lower than the corresponding current size standard. SBA obtained similar results when it calculated common size standards (which it proposes to use as an alternative to separate size standards for each industry in situations where the same businesses operate in multiple industries). Each of the three common size standards calculated and proposed for use – for subsectors 236 (Construction of Buildings) and 238 (Specialty Trade Contractors) and industry group 2371 (Utility System Construction) – were lower than the current standards for their constituent NAICS Codes. Click here to see SBA’s Table 6, summarizing these size standards calculations for NAICS Sector 23. However, because lowering size standards is inconsistent with Government efforts to stimulate the economy and would discourage job growth, SBA is not proposing the reduction of any size standards. Instead, the only proposed changes are to increase size standards for two NAICS codes not subject to common size standards: raising NAICS Code 237210 (Land Subdivision) from $7.0M to $25.5M and the Dredging and Surface Cleanup Activities exception to NAICS Code 237990 (Other Heavy and Civil Engineering Construction) from $20.0M to $30.0M.
Both proposed rules identify a number of issues on which SBA seeks comments, including its specific proposed changes to size standards, its use of eight fixed levels for receipts based size standards, and the propriety of using common size standards.
As explained in our previous blogs on this general topic, it is important to note the reviews reflected in these proposed rules do not include the impact of inflation, and SBA will consider such separately, once its current ongoing review of all size standards is completed, so as to apply such equally across-the-board to all industries at the same time.
Eric Whytsell is the attorney responsible for the content of this post.