Panoptic Enterprises'


Federal Acquisition Developments, Guidance, and Opinions

April 2004
Vol. V, No. 4


SBA Proposes to Restructure Size Standards
FY 2003 Set Record for Small Business Contract Awards
FAC 2001-21 Addresses Purchase from Federal Prison Industries
Second Proposed Rule on Material Safety Data Sheets
DFARS Limits Task/Delivery Order Contracts to Five Years
Proposed NFS Reissuance Continues with Parts 1827-1833
Nonmanufacturer Rule Waived for Turboprops

SBA Proposes to Restructure Size Standards,
Would Reduce Number of Categories from 37 to 10

The Small Business Administration (SBA) is proposing to replace most of the receipts-based small business size standards with size standards based on the number of employees of a business concern. This change would reduce the number of different size standard categories from 37 to 10, and the 10 would range between 50 employees and 1,500 employees depending on the industry or SBA program.

SBA's small business size standards have been criticized as complex, confusing, and difficult to use -- there are 37 different small business size standards for 1,151 industries, 13 sub-industries, and 11 special financial and procurement programs. These size standards use two primary measures of business size: number of employees and average annual receipts. Financial assets, electric generation, and refining capacity are used for a few specialized industries. Thirty of the size standards are based on annual receipts, five are based on number of employees, and two are based on other measures.

In many cases, a specific receipts-based size standard applies to only one or a few industries. SBA believes it can simplify the size standards and make them less complicated by establishing a single size standard measure and reducing the number of different size standard levels. The fewer size standards will be clearer, more consistent, and easier to understand, resulting in less confusion to users, particularly the non-governmental users, such as small businesses. In addition, a single size measure eliminates a problem that some concerns encounter when they operate in different industries that have different size standard measures. The information technology industries are a good example of this. Many information technology businesses provide both goods and services. But, for providers of computer and peripheral equipment, SBA's size standards are based on number of employees, and for providers of computer services, SBA's size standards are based on receipts. An information technology business may be small for one type of work but not small for a related activity.

SBA is proposing to restructure its size standards by establishing an employee-based size standard for each industry. The number of employees of a business concern is its average number of persons employed for each pay period over the firm's latest 12 months and includes the employees of all affiliates. Any person on the payroll is included as one employee regardless of hours worked or temporary status. There would be 10 size standards: 50, 100, 150, 200, 300, 400, 500, 750, 1,000, and 1,500. This restructuring would affect the standards for 514 industries.

SBA developed criteria for deciding which of the 10 size standards to apply to an industry that currently has a receipts-based size standard. The primary tool used to calculate the equivalent employee size standard associated with a receipts-based size standard is the receipts-to-employee ratio for an industry. Data to calculate these ratios were provided to the SBA by the U.S. Bureau of the Census. Since total receipts in an industry are provided along with employees in the industry, SBA was able to calculate receipts per employee ratios for almost all industries covered by this rule. The resulting figure was divided into the present receipt-based size standard for the industry under review to calculate an employee equivalent size standard. This employee equivalent size standard was then rounded to the closest of the ten employee size standard levels to minimize the difference between the current receipts-based size standard and the calculated employee-based size standard. For example, the present size standard for the Other Airport Operations industry (North American Industry Classification System (NAICS) 488119) is $6 million. Dividing $6 million by $56,969 receipts per employee resulted in the equivalent size standard of 105 employees, which the SBA has rounded to 100 employees.

However, the process is not purely mathematical; SBA took other factors into consideration. For example, Barber Shops (NAICS 81211) has the same $6 million size standard as Other Airport Operations. Dividing $6 million by $34,700 receipts per employee resulted in the equivalent size standard of 172 employees. This level rounds to 150 employees. However, SBA believes that a 150 employee size standard for barber shops is too high, and that the 50 employee size standard better matches the industry structure for barber shops, as well as public perception of what constitutes a small business in this industry. The barber industry has one of the largest concentrations of very small businesses, where the average size barber shop is only three employees.

For closely related industries (those within the same 4-digit NAICS Industry Group or 3-digit NAICS Subsector) that currently have a common receipts-based size standard, SBA proposes a common employee-based size standard, even though a different size standard could be established for each closely related industry based on the receipts-to-employee calculation. SBA recognizes that small businesses are often eligible for SBA assistance in a number of closely related industries, and it simplifies size standards if closely related industries have the same size standard. An example is the computer services industries in which businesses typically operate in at least several of the nine computer services industries. After reviewing the equivalent employee- based size standards for the nine computer services industries, SBA is recommending a common size standard of 150 employees for all nine computer services industries. Examples of other industries where SBA proposes a common size standard include the consulting service industries, the trucking industries, the warehousing industries, and the waste management industries.

In addition, SBA proposes that 31 industries have a maximum average annual receipts amount (a "receipts cap") along with the employee-based size standard. To qualify as small, concerns in those industries would have to be no greater in size than the employee-based size standard and have average annual receipts less than the receipts cap amount. In these 31 industries, businesses have more latitude in deciding whether to hire employees to perform work or to subcontract the work to others. For example, general contractors can decide what and how much construction work to perform themselves and what work to subcontract to others. Under a strict employee-based size standard, a business may exceed the size standard because it decides to perform more work in-house while another business performing the same level of work stays under the employee size standard because more work is subcontracted. This is because the employees of a subcontractor are not included in counting the number of employees of a business. The imposition of a receipts cap on these 31 industries will prevent businesses from purposely subcontracting an unusual amount of work relative to customary industry practices to retain small business status.

An analysis of the effect the revised size standards would have on small business eligibility shows that, out of approximately 4.4 million businesses in the industries with revised size standards, 35,200 businesses could gain small business eligibility and 34,100 could lose small business eligibility, resulting in a total of 1,110 additional businesses being defined as small.

Comments on the proposed size standards must be received on or before May 18, 2004, by Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW, Mail Code 6530, Washington, DC 20416. Comments may be sent to http://www.regulations.gov, by e-mail to restructure.sizestandards@sba.gov, or by fax to 202-205-6390.

FY 2003 Set Record for Small Business Contract Awards

On March 24, SBA announced that the federal government, for the first time ever, awarded more than 25% of its prime contracting dollars to small businesses in Fiscal Year 2003. Prime contract awards to small businesses accounted for $62.7 billion of business with the federal government, or 25.37% of all government prime contracting dollars. The statutory goal for awards to small business is 23%. This is an increase of $9.7 billion over FY 2002. The $62.7 billion will create or retain approximately 470,000 jobs according to the SBA.

The statistics were obtained from the Federal Procurement Data Center, the organization within the General Services Administration (GSA) that gathers statistics on solicitation methods and contract awards for Congress, the agencies, and the general public.

Every category of small business showed gains in FY 2003:

SBA identified two agencies as showing particularly strong results from their small business outreach efforts in FY 2003: the Department of Defense (DOD) awarded 24.8% of its prime contracts to small businesses, and the Department of Homeland Security (DHS) awarded 40.7% of its prime contracts to small businesses in its first year of operation.

"This is a tremendous victory for America's small business owners and for our economy," said Hector Barreto, SBA's administrator. "These record-breaking numbers did not happen by accident." Barreto cited a new SBA initiative called "Business Matchmaking" as an example of SBA's innovative approaches. Business Matchmaking is a series of events being held across the country in which small business owners can schedule one-on-one meetings with buyers from federal, state, and local governments, as well as with large corporations. More than 4,000 small businesses have participated in more than 14,500 one-on-one meetings.

FAC 2001-21 Addresses Purchase from Federal Prison Industries

On March 26, Federal Acquisition Circular (FAC) 2001-21 amended FAR Subpart 8.6, Acquisition from Federal Prison Industries, Inc., to implement Section 637 of the Consolidated Appropriations Act of 2004 (Public Law 108-199), which prohibits the expenditure of fiscal year 2004 funds for the purchase of a product or service offered by Federal Prison Industries, Inc. (FPI) unless the purchasing agency determines the offered product or service provides the best value to the buying agency.

Essentially, Section 637 of Public Law 108-199 impose the provisions of Section 811 of the National Defense Authorization Act for Fiscal Year 2002 (Public Law 101-107) and Section 819 of the National Defense Authorization Act for Fiscal Year 2003 (Public Law 107-314), which had applied only to the Department of Defense (DOD), to civilian agencies. For more on the implementation of the DOD restrictions on purchases from FPI, see the December 2003 Federal Contracts Perspective article "DFARS Agency Activity Numbers, CCR Coverage Removed."

Most of the significant changes are made to FAR Subpart 8.6, Acquisition from Federal Prison Industries, Inc.:

Comments on the interim rule must be submitted on or before May 25, 2004, to General Services Administration, FAR Secretariat (MVA), 1800 F Street, NW, Room 4035, Attn: Laurie Duarte, Washington, DC 20405; or by e-mail to farcase.2003-023@gsa.gov.

Second Proposed Rule on Material Safety Data Sheets

Because of significant comments on an earlier proposed rule that would have amended FAR Subpart 23.3, Hazardous Material Identification and Material Safety Data, and FAR 52.223-3, Hazardous Material Identification and Material Safety Data, to revise policies and procedures for contractor submission of Material Safety Data Sheets (MSDSs), a second proposed rule was published March 3.

FAR Subpart 23.3 and FAR 52.223-3 implement Federal Standard 313, Material Safety Data, Transportation Data and Disposal Data for Hazardous Materials Furnished to Government Activities (FED-STD-313), which was originally developed to extend to federal employees the protection provided by Occupational Safety and Health Administration (OSHA) laws and regulations to private sector employees.

On January 4, 2002, a proposed rule was published to revise FAR Subpart 23.3 and FAR 52.223-3 to address several concerns of industry, including: the definition of "hazardous material"; the requirement to comply with any future revisions to FED-STD-313 after contract award without an equitable adjustment; virtually unlimited government rights in the MSDS information and data without any protection for trade secrets or other proprietary data; and liability issues (see the February 2002 Federal Contracts Perspective article "FAR Policy on Material Safety Data Sheets to be Revised"). Seven comments were received and, because the resulting revisions are significant, the FAR Council published a second proposed rule.

The most significant differences between the first and second proposed rules are:

Comments on the proposed rule must be submitted on or before May 3, 2004, to General Services Administration, FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, or by e-mail to farcase.1998-020@gsa.gov.

DFARS Limits Task/Delivery Order Contracts to Five Years

DOD has amended the Defense FAR Supplement (DFARS) to specify that task or delivery order contacts may cover a total period of not more than five years. In addition, two interim rules were finalized without changes, and a proposed rule on contractor personnel in combat areas was published.

Proposed NFS Reissuance Continues with Parts 1827-1833

The National Aeronautics and Space Administration (NASA) published its third set of proposed revisions to reduce the NASA FAR Supplement (NFS) by eliminating all internal administrative procedures in NFS Parts 1827 through 1833 and retaining only the information involving the relationship between NASA and its contractors. NASA is proposing to remove NFS Subparts 1828.2, 1830.2, and 1832.9, and many NFS sections in NFS Parts 1827 through 1833.

Comments on the proposed rule should be submitted on or before May 11, 2004, to Celeste Dalton, NASA, Office of Procurement, Contract Management Division (Code HK), Washington DC 20546 or by e-mail to: Celeste.M.Dalton@nasa.gov. (For more on the proposed revision of NFS Parts 1801 through 1812, see the December 2003 Federal Contracts Perspective article "NASA FAR Supplement Reissuance Proposed." For more on the proposed revision of NFS Parts 1813 through 1825, see the February 2004 Federal Contracts Perspective article "NASA Continues Proposed NFS Reissuance.")

Nonmanufacturer Rule Waived for Turboprops

The SBA is waiving the nonmanufacturer rule for general aviation turboprop aircraft manufacturing under North American Industry Classification System (NAICS) code 441229 because no small business manufacturers are currently supplying this class of products to the federal government. This waiver will allow otherwise qualified nonmanufacturers to supply the products of any domestic manufacturer on a federal contract set aside for small business or awarded through the SBA's 8(a) program.

EDITOR'S NOTE: The nonmanufacturer rule requires those with federal contracts that are set-aside for small businesses or awarded through the 8(a) program to provide the product of a small business manufacturer or processor if the recipient is not the actual manufacturer or processor (see paragraph (f) of FAR 19.102, Size Standards). However, SBA may waive this requirement if there are no small business manufacturers or processors.

The SBA regulation on the nonmanufacturer rule is in Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration, Part 121, Small Business Size Standards, under paragraph (b) of 121.406, How Does a Small Business Concern Qualify to Provide Manufactured Products Under Small Business Set-Aside or MED [Minority Enterprise Development] Procurements? The SBA regulation on the waiver of the nonmanufacturer rule is 13 CFR 121.1202, When Will a Waiver of the Nonmanufacturer Rule Be Granted for a Class of Products?

Copyright 2004 by Panoptic Enterprises. All Rights Reserved.

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