On April 26, 2022, the U.S. Small Business Administration (SBA) issued a proposed rule regarding its small business size standards for federal contractors in manufacturing and other industries with employee-based size standards. Small business federal contractors should take note of the proposed changes and consider whether to address this proposal by submitting a public comment by the June 27 deadline.

SBA’s proposals include potential increases in the size standards for 150 industries. These include the size standard for surgical appliance and supplies manufacturing under NAICS code 339113 (which would increase from 750 to 800 employees) and the environmental remediation services exception to NAICS code 562910 (which would increase from 750 to 1,000 employees). SBA proposed no change to 282 size standards, including the 150-employee size standard that applies to IT value-added resellers and the 500-employee size standard that applies to small business resellers under SBA’s nonmanufacturer rule.

We work with many small business resellers that pursue federal contracts under SBA’s nonmanufacturer rule and depend on resale of products made by others. Federal resellers are a critical part of the industrial base because manufacturers often do not want to sell directly to the government and prefer to work with their small business reseller partners. Resellers often have high revenue but very low profit margins, so their high revenues do not always accurately reflect the size and scale of their businesses.

Therefore, one of the headlines from SBA’s proposed rule is its commentary on the size standard for nonmanufacturers. SBA’s nonmanufacturer rule—which governs how a reseller qualifies as a small business for federal procurements—has appropriately used an employee-based size standard, set at 500 employees. SBA’s proposed rule indicates that SBA intends to keep the 500-employee size standard for nonmanufacturers. However, SBA’s analysis revealed that the nonmanufacturer size standard should be increased to 550 employees. The agency’s rationale for not increasing the size standard is questionable—it says it wants to “maintain continuity with general public familiarity” with the 500-employee size standard, which “continues to work well for the majority of firms to which it applies.” Public familiarity and a current size standard’s ability to “work well” for some firms should not be the guide for determining whether to increase the size standard when SBA’s analysis supports increasing the nonmanufacturer rule size standard to 550 employees.

Of greater concern to the small business reseller community, SBA also invited comments on whether it should change its method for determining a nonmanufacturer’s size. Specifically, it wants feedback on whether it should base the nonmanufacturer size standard on revenue rather than number of employees. SBA does not seem inclined to make this change because its analysis shows that “adopting a receipts-based size standard could cause thousands of firms to lose their small business status” and would likely reduce the number of set-asides for small business resellers. Nevertheless, SBA has asked the public to comment on whether the employee-based size standard for the nonmanufacturer rule is appropriate and to offer suggestions for alternate ways to measure the size of nonmanufacturers. 

We strongly encourage all small business resellers to submit comments, which are due June 27, 2022. If you are a federal reseller and would like assistance in understanding the impact of the proposed rule on your business, or in preparing comments to SBA, please contact Jon Williams, the author of this client alert and chair of PilieroMazza’s Government Contracts Practice Group, at [email protected]