Dive Brief:
- The Small Business Administration has drawn fire for its proposal to increase the eligibility for federal contracts, with critics saying the plan would intensify competition for smaller firms and increase challenges for entrepreneurs planning to start a business.
- Under a proposed rule released last month, the SBA would raise the employee and revenue eligibility levels for companies applying for federal contracts, opening up business opportunities for more than 114,000 companies.
- “The rule risks redefining ‘small business’ into what is effectively a mid-size business category,” Tangent Technologies, based in McLean, Virginia, said in a submission on the SBA’s public comment page. “That outcome would be unfair to truly small businesses that rely on SBA programs, set-aside contracts and small business contracting goals to compete against firms with far greater staffing, capital, past performance, infrastructure and administrative capacity.”
Dive Insight:
By expanding contract eligibility, the Trump administration aims “to reward growth rather than force successful firms out of small business eligibility prematurely, especially those in industries that are critical to American strength,” the SBA said.
For example, SBA would raise the employee size standard for semiconductor manufacturers to 2,800 from 1,250, for shipbuilding to 2,300 from 1,300 and for oil drilling to 2,650 from 1,000, the SBA said.
The eligibility level for revenue among companies involved in “animal production” would increase to $71 million from $11 million, according to the SBA.
The SBA also aims to ease regulatory complexity by slashing the number of classifications under the North American Industry Classification System from nearly 1,000 to 338.
Eligibility levels will rise tenfold or more in professional services, information technology, engineering, logistics and hospitality, according to Christopher Slottee, an attorney at Schwabe, Williamson & Wyatt.
“If your firm is comfortably small today, expect tougher competition,” he said.
“If your firm outgrew its size standard, you may be small again” and regain eligibility for “set-asides, SBA loan programs and small business subcontracting credit,” Slottee said in a note. The changes would also eliminate “the pressure to restrain growth to stay under a cap.”
The owner of Custom Electric & Communications, an electrical contracting business in Merrimack, N.H., said in a comment that the proposal to shift loan eligibility from a $19 million revenue-based standard to a 550 employee-based standard would lead to “the progressive displacement of true small businesses.”
The change “would allow companies generating well over $100 million in annual revenue to continue qualifying as ‘small,’” the business owner said. “A $5 million to $8 million electrical contractor cannot reasonably compete against an organization of that magnitude for the same set-aside contracts.”
An entrepreneur planning to start an information technology company serving federal health agencies applauded the proposed streamlining of NAICS codes to 338, saying the move would make “the system simpler and more predictable.”
Yet the change in eligibility for companies in the computer systems design and related services classification to $531 million in revenue from $34 million would put start-up companies at a disadvantage.
“Federal source selection in IT services often turns heavily on past performance and demonstrated capacity,” the entrepreneur said.
“A new entrant with a handful of employees, which is exactly what my firm will be, cannot outscore a $300 million incumbent on those factors,” he said.
Not all of the 732 comments to the SBA are negative.
“As a specialty masonry contractor, we have experienced substantial increases in labor, material, insurance, equipment and compliance costs over the past decade,” the chief business development officer at Gallegos Corporation, based in Wolcott, Co., said in a comment.
“Revenue growth alone does not accurately reflect market dominance or competitive position within the construction industry,” the Gallegos executive said.
