On June 6, 2022, the Small Business Administration (SBA) issued a final rule that changes how a company calculates its size using an employee-based sizing standard. In recent years, the SBA has also changed how a company calculates its size using a revenue-based sizing standard. These changes make it easier for growing businesses to maintain their small business status longer and allow them to continue pursuing premium contracting or subcontracting opportunities reserved for small businesses. Below we summarize the key rules for determining whether a company is “small” for purposes of federal government contracts.
NAICS codes and size standards
The relevant size standard for a federal government principal contract is determined by the North American Industry Classification System (NAICS) code that the government assigns to the contract. For certain NAICS codes, such as those applicable to manufacturing, the SBA uses an employee-based size standard, meaning that a vendor is a small business for that NAICS code if the total number of employees of the vendor and all of its “affiliates” is equal or less than the number of employees in the specified size standard. For other NAICS codes, such as For example, for construction and services, the size standard is a revenue-based size standard, meaning a vendor is a small company for that NAICS code if the aggregate average annual revenue (or revenue) of the vendor and all of its “affiliates” is smaller or equal to the specified dollar amount. The table of SBA size standards can be found here.
It is important for providers to summarize the number of employees / annual revenue of the provider and all of its affiliates. Analyzing whether a company qualifies as an “affiliate” can be complicated, and the SBA’s affiliation rules for procurement are set out in 13 CFR 121.103 (Note: Different methods of calculating an entity’s size status, including different affiliation rules, apply at other SBA programs, including those applicable to SBA loans and bond guarantees, and Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) contracts).
How do I calculate the size of my company using an employee-based sizing standard?
Effective July 6, 2022, a company must calculate its headcount using an employee-based sizing standard by averaging the total headcount of the company (and its affiliates) for each pay period over the preceding completed period 24 Months. This is double the time the SBA has previously used to assess a company’s size using employee-based size standards, meaning companies that have experienced rapid growth over the past 12 months may still be considered small now can be ranked based on a lower headcount in the first few months of the biennium.
When calculating headcount for SBA size standard purposes, a company must include all individuals employed by the company on a full-time, part-time, or “other” basis, such as: Include temporary workers in the count. This average number of employees also includes the employees of all domestic and foreign subsidiaries of the company.
If the company has been in business less than 24 months, it calculates its headcount by averaging its headcount for each pay period it has been in business.
For any proposal or offer submitted before Beginning July 6, 2022, companies should continue to calculate their headcount using the average headcount for the preceding full 12 calendar months. If the company was out of business 12 months prior to the date its size was determined, the average number of employees for each of the pay periods it was in business is used to determine the size of the company.
How do I calculate the size of my business using a revenue-based sizing standard?
Earlier this year, the SBA finally updated its rules to extend the period for calculating company size under a revenue-based standard from three years to five years. The shorter three-year period often penalized companies that won a significant contract by stripping them of small business status relatively soon after the contract was awarded. By extending the period for calculating average earnings by an additional two years, the SBA’s new rules should allow companies to maintain their small business status for longer by reducing the impact of an exception year or two on the calculation.
On or after January 6, 2022, for a contract using revenue-based sizing standards, a company must calculate its average annual revenue based on the total revenue of the company and its domestic and foreign subsidiaries for the last five closed fiscal years, divided by five. “Revenue” means “all income in any form whatsoever received or accrued from any source, including sales of products or services, interest, dividends, rent, royalties, fees or commissions, less returns and commissions.” 13 CFR 121.104. (See 13 CFR 121.104 for a more detailed description of what is included and what is excluded from the annual revenue calculation).
If the company has been in business for less than five complete fiscal years, its average annual revenue is the total revenue for the period it has been in business divided by the number of weeks in business multiplied by 52.
For any proposal or offer submitted before Effective January 6, 2022, for a contract with a revenue-based size standard, the entity may choose to calculate its annual revenue and its affiliates’ revenue using either the current five-year look-back period, or the previous three-year lookback period. For these sizing determinations prior to January 6, 2022, a company had the opportunity to select the method that resulted in the lowest average annual revenue, potentially extending the period over which a growing business can be considered a small business.
What does this mean for my company?
These changes require that a company wishing to be considered a small business under a federal procurement contract be vigilant in determining the specific rules that apply to both the type of contract and the type of contract being pursued and the date when its size is determined for a specific procurement. The longer lookback period could allow companies that do not currently qualify as small, based on the increase in their hiring over the past year, to qualify as small as part of the two-year lookback period — especially given that the biennium includes several, at least initially Months when companies may have had reduced headcount due to the impact of pandemic-related closures.
Of course, the longer retrospective period could no longer make small companies small, for example if they had significantly higher employee numbers or sales in the months or years previously excluded from the calculation. As such, companies should ensure they calculate their size status within the appropriate look-back period and update their representations and certifications in the System for Award Management at www.sam.gov accordingly.
Any business that previously qualified as a small business but will no longer qualify as a small business under the new methods of calculating size will no longer be eligible to bid on new small business closure contracts and may be subject to additional compliance obligations of which small Enterprises are exempt (e.g. small enterprise subcontracting plan, cost accounting standards, etc.).