With changes to size standards this year based on inflation estimated to enable 89,730 firms to gain small business status, annual size recertification requirements, and potentially severe penalties for misrepresentation of size, it is essential that government contractors calculate their size correctly and keep their System for Award Management profile up to date. This is often daunting, as size standards differ by industry and, depending on your industry and the procurement you are pursuing, you may have to calculate your size with employee numbers or annual receipts, which includes those of your affiliates. Below is a simple guide for calculating your company’s size, with supporting resources from SBA.
Know Your NAICS Code
SBA’s size standards vary by North American Industry Classification System (NAICS) codes. If you are competing for a contract set-aside for small businesses under a specific NAICS code, you must be considered small for that NAICS code. Size standards are typically expressed either by number of employees or annual receipts, see 13 CFR §121.201, which indicates the maximum number of employees or average annual receipts a concern and its affiliates are allowed to be considered small within a NAICS code.
If you are unsure what your primary NAICS code is, you would typically look to the code under which you received the biggest portion of your revenues during your last fiscal year. This can of course change over time. Importantly, you are able to pursue work under any NAICS code, regardless of your primary code. If the contract is set-aside for a certain socioeconomic designation, the key is to make sure that you are small under the NAICS code assigned to the procurement.
When you calculate the size of your business with annual receipts or employee numbers, you must include the figures from your affiliates. Affiliation is very fact-specific and should be reviewed on a case-by-case basis. There are many bases to find affiliation. If you have any questions regarding affiliation, we are here to help.
Annual Receipts-Based Size Calculation
In calculating receipts, SBA regulations advise that generally, receipts are considered “total income” or, in the case of a sole proprietorship, “gross income” plus “cost of goods sold” as these terms are used on tax returns. 13 CFR §121.104. Meaning, in order to calculate your receipts for a particular year, you add the figures on the “total income” and “cost of goods sold” lines on your federal tax returns; you do not simply look at the “gross receipts or sales” line item.
Please note that Federal income tax returns and any amendments filed with the IRS on or before the date of self-certification must be used to determine the size status of a concern. However, even if tax returns are not filed as of the date of self-certification, you should still use other items, such as financial statements, to calculate your size. It is a common misconception that companies do not have to factor in their prior year revenues until tax returns are filed. Additionally, you must factor in “all revenue.” You are not permitted to calculate size based on revenues earned only under your primary NAICS code.
Depending on how long you have been in business and based on SBA’s current regulations, “annual receipts” may mean the average annual total receipts of your business over the last three fiscal years or, in the case of a concern which has been in business for less than three complete fiscal years, the total receipts for the period the concern has been in business divided by the number of weeks in business and multiplied by 52. As you may be aware, the Small Business Runway Extension Act, which changed the period of measurement for a receipts-based size calculation from three to five years, became law on December 17, 2018. SBA published its proposed rule on June 24, 2019, to change its regulations to contemplate the five-year calculation period, but to-date no final rule has been issued.
Affiliation can also prove problematic in receipts-based size calculation because, if a concern has acquired an affiliate or been acquired as an affiliate during the applicable period of measurement or before the date on which it self-certified as small, the annual receipts used in determining size status includes the receipts of the acquired or acquiring concern. Furthermore, this aggregation applies for the entire period of measurement, not just the period after the affiliation arose.
Employee-Based Size Calculation
When your size standard is calculated based on number of employees, your size is calculated from the average number of employees for each of the pay periods for the preceding 12 months. If your firm has not been in business for 12 months, use the average number of employees for each of the pay periods during which it has been in business. Employee averages from affiliates are similarly calculated and added. Issues can arise, though, because employees are not crisply defined, since, when determining whether individuals are employees, “SBA will consider the totality of the circumstances.” 13 CFR §121.106.
If you have questions about size calculation or other matters relating to government contracts and small businesses, please contact a member of PilieroMazza’s Government Contracts Law and Small Business Programs & Advisory Services practice groups.
Meghan Leemon, the author of this blog, is an Associate in PilieroMazza’s Government Contracts Law and Small Business Programs & Advisory Services practice groups.