Big Changes to Small Business Size Rules for Government Contract Set-Asides:

The new year (specifically, January 6, 2020) will bring new rules for small businesses in government contracting. Even if you’re a large business, this is important because it affects your supply chain. In fact, you might actually qualify as a small business now!

Here’s the deal: To qualify for government contract set-asides, small businesses can calculate their revenue based on the average of the last five years, instead of the last three years. There’s also a two-year “grace period” that allows companies to choose either five years (new rule) or three years (old rule). Read more to find out how this will affect the industry.

Small business policy affects every federal contractor and subcontractor

Small businesses receive preferential treatment in government contracting. Almost a quarter of all federal contracts are “set aside” or reserved exclusively for small business. There’s also a preference for small business subcontractors because many prime contractors must submit a small business subcontracting plan. Therefore, small business policy matters to everyone involved in government contracting!

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Small Business Runway Extension Act of 2018 and SBA’s final rule (regulation)

This change to the small business size standards originated in legislation. Congress’ intent for the Small Business Runway Extension Act of 2018 was to “help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.”

Translation: this law gives many companies more flexibility to qualify for small business set-asides for a longer period of time. The flexibility comes from being able to calculate average revenue over five years, rather than over three years. Even better, there’s a two-year “grace period” (January 6, 2020 to January 6, 2022) built into the Small Business Administration’s regulation which implements this law.

Congress wants small business contractors to have an easier transition into the big-boy leagues! Once those small business set-asides dry up, many formerly small contractors get crushed by the competition.

Growing pains: small to “large”

The transition from being considered a small business to suddenly being in the same league with Boeing and Booz Allen Hamilton is fraught with peril. Many small businesses choose to sell or be acquired by a larger company once they’re close to losing their size status.

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What if I’m not small, but I’m not large?

I’ve got some bad news for you. If you’re not small, you’re “large!” There is no middle ground. There is no Medium-Sized Business Administration. All we have is the Small Business Administration (SBA). That’s why many small business advocates asked for some form of relief for contractors who are not quite small yet definitely not large. This new law (and corresponding SBA regulation) is meant to help.

How this new law (and SBA regulation) works

To receive small business set-asides, you must qualify under the specific NAICS (North American Industry Classification System) code for that particular contract. You can be “small” for one contract and its NAICS code, and “other than small” for another contract and its respective NAICS code. It all depends on the specific contract and the NAICS code that the contracting officer selects.

Calculating average revenue to determine small business status

The NAICS code qualification is tied to the number of employees or revenue. Employee headcounts are easy, but revenue is tricky. The old rule was that you calculate the average of your last three years of revenue.

Starting on January 6, 2020, the new rule is to calculate the average of your last five (5) years of revenue.

Let’s run through some examples based on a NAICS code of $50 million.

Example: Up-and-Coming Corporation (UCC)

UCC has sudden, explosive growth due to some big contracts in the last two years:

2014: $25 million

2015: $24 million

2016: $26 million

2017: $27 million

2018: $63 million

2019: $65 million

Under the old rules, UCC is not a small business. The average over the last three years is $51.7 million, greater than the $50 million limit.

Under the new rules, UCC is still a small business! The average over the last five years is $41 million, less than the $50 million limit. UCC loves the new law!

Example: Slowing Down Corporation (SDC)

SDC had some giant contracts in the past, but has recently slowed down.

2014: $41 million

2015: $60 million

2016: $71 million

2017: $49 million

2018: $48 million

2019: $49 million

Under the old rules (calculating average revenue over 2017, 2018, and 2019), SDC is a small business. The average over the last three years is $48.7 million.

Under the new rules…if there were no grace period…SDC would lose its small business status because it must take into account those high-revenue years in 2015 and 2016 which fall under the last five years!

Luckily for SDC, the SBA’s implementing regulation provides for a two-year grace period from January 6, 2020 to January 6, 2022. During this grace period, SDC can choose to calculate its average revenue using the old rule of three years and therefore “stay small.” SDC should send a “Thank You” card to the SBA’s policy shop!

Remember, during the two-year grace period, your company can choose to calculate average revenue in two different ways: the old rule (over three years) or the new rule (over five years). Pick the one that helps you, but prepare for the inevitable future, when you will be forced to calculate over five years!

Christoph Mlinarchik, JD, CFCM, PMP is the owner of dating rich men, providing expert advice in government contracts: consulting, professional instruction, and expert witness services. Contact Christoph at dating site in ilorin

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