By: Hanna Lee Blake, Partner, Watt Tieder
August 10, 2023

Thanks to the SBA’s November 17, 2022 adjustments to the size standards and monetary thresholds, a number of construction contractors will be able to retain their “small” status, and more contractors may benefit from federal assistance, programs, and contracts earmarked for “small” concerns. In the SBA’s view, small businesses should not lose their “small” status due solely to price level increases rather than from increases in business activity. It is anticipated that federal agencies may choose to set aside more construction contracts for competition among small businesses given the greater number of businesses that may be deemed “small” as a result of the SBA’s recent rule. In light of this, small construction contractors should consider whether it is prudent to register or update their existing profiles in the System for Award Management (SAM) to participate in federal contracting.

The SBA’s Statutory Mandate 

The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA and justified the agency’s existence on the grounds that small businesses are essential to the maintenance of the free enterprise system. The congressional intent was to assist small businesses as a means to deter monopoly and oligarchy formation within all industries and the market failures caused by the elimination or reduction of competition in the marketplace. Congress delegated to the SBA the responsibility to establish size standards to ensure that only small businesses were provided SBA assistance. Since that time, the SBA has analyzed various economic factors, such as each industry’s overall competitiveness and the competitiveness of firms within each industry, to set its size standards.

The SBA currently uses two types of size standards to determine SBA program eligibility: (1) industry-specific size standards; and (2) alternative size standards based on the applicant’s maximum tangible net worth and average net income after federal taxes. The SBA also uses industry-specific size standards to determine eligibility for federal small business contracting purposes. For the majority of industries and subindustry activities identified in the North American Industry Classification System (NAICS), the size standards are based on either the firm’s number of employees or average annual receipts. Overall, about 97% of all employer firms qualify as small, and these firms represent about 30% of industry receipts.

In 2010, Congress enacted the Small Business Jobs Act (Jobs Act). Section 1344 of the Jobs Act requires the SBA to conduct a detailed review of all size standards and to make appropriate adjustments to reflect market conditions. Specifically, the Jobs Act requires the SBA to review at least 1/3 of all size standards during every 18-month period after the date of the law’s enactment and to review all size standards not less than once every five years, thereafter. The rolling reviews conducted by the SBA under the Jobs Act focus primarily on industry structure (i.e., average firm size, startup costs and entry barriers, industry concentration, and distribution of firms by business size) and federal contracting trends (i.e., small business share of federal contract dollars relative to small business share of total industry receipts) for industries with significant contracting activities. The SBA completed its first five-year rolling review under the Jobs Act in 2016. It is estimated that as a result of the first five-year review, more than 72,000 small businesses gained SBA eligibility. The SBA does not typically account for inflation as a factor in these five-year reviews, but monitors inflation separately to determine whether to make additional adjustments to the size standards. The SBA estimated that the changes it made in July 2019 for inflation, enabled approximately 89,890 firms above the SBA’s size standards at the time to gain small business status and become eligible for SBA programs, resulting in between $700 million and $750 million in additional small business federal contract dollars.

Economic Conditions Warranting SBA Action 

Per its own regulatory requirements, the SBA assesses the impact of inflation on its monetary-based size standards at least once every five years. Until November 17th, the SBA had adjusted its monetary-based size standards for inflation on eight occasions, i.e., 1975, 1984, 1994, 2002, 2005, 2008, 2014 and 2019.

Having just made adjustments for inflation in 2019, the SBA could have waited until 2024 to make another adjustment. It, however, determined that the undeniable and unprecedented inflationary factors impacting contractors justified intervention. Construction contractors and others have been and continue to be plagued by the COVID-19 pandemic that first surfaced in 2020, supply-chain issues, drastic material escalation, labor shortages and related economic effects. At the end of 2022, inflation hit a 41-year high. Throughout 2022, the Federal Reserve enacted multiple interest rate increases, including the highest interest rate hike in the last 28 years in June 2022.

Per the U.S. Census Bureau report in 2019, approximately 90% of all construction establishments had less than 20 employees, although firms with more than 500 employees employed over 80% of the workforce. Thus, the construction industry is comprised of many small businesses that are particularly susceptible to market fluctuations and related economic challenges.

The Producer Price Index for construction materials made a significant leap during the pandemic and reached an all-time high in 2022.

Construction costs for key commodities have been volatile over the past three years. Sharp cost escalation, such as that seen in steel, lumber, fuel, and construction materials have caused significant economic hardship particularly for small and disadvantaged firms. Recognizing that size matters, particularly in the current economic climate, the SBA identified the following primary benefits of its November 17th rule:

  • Some businesses that are above the current size standards may gain small business status under the higher, inflation-adjusted size standards, thereby enabling them to participate in federal small business assistance programs;
  • Growing small businesses that are close to exceeding the current size standards will be able to retain their small business status under the higher size standards, thereby enabling them to continue their participation in the programs; and
  • Federal agencies will have a larger pool of small businesses from which to draw for their small business procurement programs.

SBA’s Adjustments To Its Size Standards 

The SBA used the chain-type price index for the U.S. Gross Domestic Product (GDP) as the measure of inflation to adjust its size standards. The GDP price index for the base period (i.e., fourth quarter of 2018 – the end period for the 2019 inflation adjustment) was 111.191 and, according to the Bureau of Economic Analysis (BEA) GDP advance estimate released on July 28, 2022 (the latest available when the rule was prepared), the GDP price index for the end period (i.e., second quarter of 2022) was 126.367. As such, the SBA determined that inflation increased 13.65 percent since the fourth quarter of 2018.

  • Receipts-Based Industry Size Standards 

The SBA adjusted all receipts-based size standards by multiplying the size standard by 1.1365 and rounding the results to the nearest $500,000 (except for agricultural industries that were rounded to the nearest $250,000). For construction firms that fall into the various building construction and heavy and civil engineering construction sub-categories, the new threshold will be set at average annual receipts of $45 million, up from the $39.5 million in 2019. For companies in the specialty trade contractors category, the new benchmark is $19 million, an increase from $16.5 million. For architectural and engineering services, the SBA’s new thresholds are $12.5 million and $25.5 million, up from $11 million and $22.5 million, respectively.

SBA’s Adjustments To Economic Disadvantage Thresholds

The SBA also reviewed its thresholds used to determine whether an individual is “economically disadvantaged” for purposes of the 8(a) Business Development (BD) Program and the Economically-Disadvantaged Women-Owned Small Business (EDWOSB) Program. Using the GDP price index, the SBA determined that inflation has increased by 11.86 percent since the existing monetary thresholds had been implemented in the second quarter of 2020. By multiplying each limit by 1.1186, and then rounding the figures, the SBA has increased the net worth limit for economically-disadvantaged individuals to $850,000, the aggregate gross income limit to $400,000, and the total asset limit to $6.5 million.

SBA’s Adjustments To Monetary Limits For 8(a) Sole Source Contracts 

Since 1998, 8(a) BD participants were precluded from receiving sole source 8(a) contract awards if they had received a combined total of competitive and sole source 8(a) contracts in excess of $100,000,000 during participation in the 8(a) BD Program. The SBA had never adjusted this threshold for inflation. The SBA found that inflation has increased by 68.33 percent since 1998. Accordingly, the SBA has now increased this threshold to $168,500,000 (rounded).

Watt Tieder is one of the largest construction boutique law firms in the United States, with a diverse and experienced team of attorneys representing many of the world’s leading corporations, developers and contractors on both domestic and international projects. We represent more than half of the Top 30 Engineering News Record contractors and most of the nation’s top sureties. With offices in six cities in the United States, the firm is a dynamic, mid-size boutique that provides knowledgeable and practical legal representation to the construction, surety, government contracts and bankruptcy industries world-wide.

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