Size Standards Analysis: SBA Methodology

1. Size Standards Analysis: SBA Methodology Presented to: The Council on Federal Procurement of Architectural & Engineering Services (COFPAES) By: Khem R. Sharma SBA Office of Size Standards December 15, 2009

2. Size Standards Analysis: General Approach • Assess industry characteristics & structure • Examine Federal contracting trends • Evaluate impacts on Federal small business assistance programs • Ensure supportability & consistency

3. An Overview of Size Standards Methodology • Legislative definitions/requirements (15 U.S.C. § 632) • Independently owned & operated • Not dominant in field of operation • U.S. based – make significant contributions to the economy • “Smallness” shall vary by industry to reflect differing industry characteristics Adjustment of monetary size standards for inflation Industry structure and Federal procurement trends Primary factors 1. Industry structure 1.1. Average firm size 1.2. Average assets size 1.3. Industry concentration 1.4. Size distribution of firms 2. Federal procurement - small business share in federal contracts Secondary factors 1.Technological change 2. Competing products from other industries 3. Industry growth trends 4. History of activity in the industry 5. Impacts on SBA programs Weighting method • Public input • Input from industry groups • Public comments on proposed rule • Input from other Federal agencies Proposed size standards Final size standards

4. What Triggers A Size Standards Review? • Changes in industry structure • Inflation • Changes in the industry classification system • Changes in Federal contracting market place and other small business assistance programs • Requests from industry groups and other Federal agencies • Economic events and disasters

5. Industry Analysis • Average firm size • Receipts • Number of employees • Average assets size (startup costs) • Industry concentration • 4-firm concentration ratio • Distribution of firms’ market share by size • Gini coefficient

6. Program Considerations and Other Factors • Federal contracting programs • Small business share of total Federal contracting dollars • Small business share of total industry’s receipts • SBA loan programs (secondary factor) • Technological change (secondary) • Industry growth trends (secondary) • Historical experience in the industry (secondary)

7. Development of Size Standards: Industry Analysis • Establish comparison industry groups • Establish a set of fixed size standard levels • Compare characteristics of each industry with those of the anchor size group • Establish a separate size standard for each characteristic • If specific industry’s characteristics are similar to those of the anchor group, the anchor standard is adopted • Significant differences from the anchor group would support a size standard above or below the anchor size standard

8. Comparison Groups Receipts-based size standards: I. Anchor group Industries with $7 million size standard II. Higher-level size standard group Industries with size standards of $23 million or higher (group average $29 million)

9. Comparison Groups Contd. Employee-based Size Standards: I. Anchor Group Industries with 500-employee Size Standard (100 employees for wholesale industries) II. Higher-level size standards group Industries with size standards of 1,000 employees

10. Receipts-based Size Standards (8 fixed levels) $5.0 million $7.0 million (anchor size) $10.0 million $14.0 million $19.0 million $25.5 million $30.0 million $35.5 million

11. Employee-based Size Standards (8 fixed levels) 50 employees 100 employees (anchor size for Wholesale Trade) 150 employees 200 employees 250 employees 500 employees (anchor size for Manufacturing) 750 employees 1,000 employees

12. Example: Size Standard Based on Average Firm Size Industry Data About 50% Between Anchor & Higher LevelGroup

13. Example – Contd. Size Standard Based on Average Firm Size Size Standard About 50% Between Anchor & Higher Level Group

14. Development of Size Standard: Analysis of Federal Contracting Data • Review industries with ≥ $100 million in Federal contracts annually • Compare small business share of Federal contract dollars to small business share of industry’s total sales • If Federal procurement small business share is significantly less than industry’s small business share, apply a fixed size standard above current size standard, as follows: • 10% to 30% discrepancy, one fixed size standard level • > 30% discrepancy, two fixed size standard levels

15. Average Size Standard - Example

16. Steps in Size Standards Analysis • Compare specific industry with comparison group averages • Estimate size standard for each industry and Federal procurement factor • Round estimated size standard to a fixed size standard level • Calculate average size standard from all factors • Select size standard • Prepare proposed rule and seek public comments • Evaluate public comments and prepare final rule

17. Challenges • Lack of documentation of a detailed analysis for historical development of some size standards • Lack of up-to-date data on industry structure, especially at a sub-industry level (e.g., exceptions under NAICS 541330, or separating surveying and mapping services) • Economic Census (industry data)- 4 to 5 years old • Risk Management Association (average assets data) – some industries are not covered • FPDS (Federal procurement data) – lacks specific size of individual contractors • Rule making process

18. Comprehensive Size Review Schedule (tentative)

19. Our Contact Information • Mail Small Business Administration Office of Size Standards 409 3rd Street, SW., 8th Floor Washington, DC 20416 • Email: sizestandards@sba.gov • Telephone: 202-205-6618 • Website: http://www.sba.gov/size