Let’s talk about one method of calculating size under SBA’s regulations. To do so, we must distinguish between receipts-based size standards and employee-based size standards.
Receipts-based size standards
Many size standards (attached to NAICS codes) are dollar-based. That is, a company’s average annual receipts must fall under the size standard if it wants to be small. To figure a company’s size under a receipts-based standard, one averages the firm’s receipts over the past 5 completed fiscal years.
Now, that is a change from a few years ago. It used to be that firms averaged their receipts over the past 3 completed fiscal years to determine size. But Congress changed the averaging period to 5 years, and SBA updated its rule accordingly (though, SBA took its sweet time in doing so).
Employee-based size standards
Other size standards (particularly those for manufacturing NAICS codes) are employee-based. For size purposes, the current rule requires firms to average their employee count over the last 12 completed months, with each pay period as a different data point. So, if a firm pays its employees twice monthly, that means there are 24 pay periods in the 12-month period. For each pay period, the firm counts all its employees and and then divides the sum by 24 (pay periods).
Proposed rule and its effects on employee-based size standards
Recently, Congress–as part of the 2021 NDAA–changed the averaging period to 24 months. In response, SBA has issued a new proposed rule to reflect that change in its regulations. The comment period closes on December 2, 2021.
If the proposed rule ultimately takes effect, SBA will calculate size for employee-based size standards by using the past 24 completed months. So, if a firm has 48 pay periods over that time, here’s the calculation: calculate the employees for each pay period, add them together, and divided by 48.
The proposed doesn’t touch other important details for calculating employees. For example, all firms must still count all employees, whether full-time, part-time, or otherwise. This includes temporary employees and those from a PEO. Also, part-time and temporary employees count the same as full-time employees.
The purpose of this legislative and regulatory change is generally laudable: providing firms with more time to develop competitiveness for when they outgrow their size standards. But some companies, such as those with declining employee counts, will take a hit; a 24-month averaging period will result in a higher average than a 12-month period. But overall, the rule should have some positive benefits: current large and mid-size businesses could regain small business status and advanced small businesses can extend their small business status.
Which firms are affected?
This proposed rule is consequential for many businesses. SBA has assigned employee-based size standards to many manufacturing NAICS codes –which agencies should use when purchasing supplies. But SBA has also assigned employee-based size standards various mining, utilities, transportation, publishing, telecommunications, insurance, and environmental remediation industries. Beyond that, the nonmanufacturer rule also uses a 500-employee size standard. So, the new 24-month averaging period will directly affect many firms that rely on the nonmanufacturer rule to supply goods to the federal government.
If you have any questions about size calculations or any other aspect of SBA’s government contracting regulations, give us a call at 913-354-2630.
SBA Moves to Change Averaging Period for Employee-Based Size Standards was last modified: November 9th, 2021 by