Small Business Size Standards: Educational Services

November 15, 2011

[Federal Register Volume 76, Number 220 (Tuesday, November 15, 2011)]
[Proposed Rules]
[Pages 70667-70680]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29445]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AG29
Small Business Size Standards: Educational Services
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA) proposes to
increase small business size standards for nine industries in North
American Industry Classification System (NAICS) Sector 61, Educational
Services. As part of its ongoing comprehensive size standards review,
SBA has evaluated all size standards in NAICS Sector 61 to determine
whether the existing size standards should be retained or revised. This
proposed rule is one of a series of proposals that will examine size
standards of industries grouped by NAICS Sector. SBA issued a White
Paper entitled ``Size Standards Methodology'' and published a notice in
the October 21, 2009 issue of the Federal Register that ``Size
Standards Methodology'' is available on its Web site at http://www.sba.gov/size for public review and comments. The ``Size Standards
Methodology'' White Paper explains how SBA establishes, reviews and
modifies its receipts based and employee based small business size
standards. In this proposed rule, SBA has applied its methodology that
pertains to establishing, reviewing and modifying a receipts based size
standard.
DATES: SBA must receive comments to this proposed rule on or before
January 17, 2012.
ADDRESSES: You may submit comments, identified by RIN 3245-AG29 by one
of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov; follow the instructions for submitting comments;
or (2) Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size
Standards Division, 409 Third Street SW., Mail Code 6530, Washington,
DC 20416. SBA will not accept comments to this proposed rule submitted
by email.
SBA will post all comments to this proposed rule on http://www.regulations.gov. If you wish to submit confidential business
information (CBI) as defined in the User Notice at http://www.regulations.gov, you must submit such information to U.S. Small
Business Administration, Khem R. Sharma, Ph.D., Chief, Size Standards
Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416,
or send an email to sizestandards@sba.gov. You should highlight the
information that you consider to be CBI and explain why you believe SBA
should hold this information as confidential. SBA will review your
information and determine whether it will make the information public
or not.
FOR FURTHER INFORMATION CONTACT: Khem R. Sharma, Ph.D., Chief, Size
Standards Division, (202) 205-6618 or sizestandards@sba.gov.
SUPPLEMENTARY INFORMATION: To determine eligibility for Federal small
business assistance, SBA establishes small business size definitions
(referred to as size standards) for private sector industries in the
United States. SBA uses two primary measures of business size: average
annual receipts and average number of employees. SBA uses financial
assets, electric output, and refining capacity to measure the size for
a few specialized industries. In addition, SBA's Small Business
Investment Company (SBIC), Certified Development Company (504) and 7(a)
Loan Programs use either the industry based size standards or net worth
and net income based size standards to determine eligibility for those
programs. At the beginning of SBA's comprehensive size standards
review, there were 41 different size standards, covering 1,141 NAICS
industries and 18
[[Page 70668]]
sub-industry activities (``exceptions'' in SBA's table of size
standards). Thirty-one of these size levels were based on average
annual receipts, seven were based on average number of employees, and
three were based on other measures. In addition, SBA has established 11
other size standards for its financial and procurement programs.
Over the years, SBA has received comments that its size standards
have not kept up with changes in the economy, in particular the changes
in the Federal contracting marketplace and industry structure. The last
time SBA conducted a comprehensive review of size standards was during
the late 1970s and early 1980s. Since then, most reviews of size
standards have been limited to in-depth analyses of specific industries
in response to requests from the public and Federal agencies. SBA also
makes periodic inflation adjustments to its monetary based size
standards. SBA's latest inflation adjustment to size standards was
published in the Federal Register on July 18, 2008 (73 FR 41237).
Because of changes in the Federal marketplace and industry
structure since the last overall review, SBA recognizes that current
data may no longer support some of its existing size standards.
Accordingly, in 2007, SBA began a comprehensive review of all size
standards to determine if they are consistent with current data, and to
adjust them when necessary. In addition, on September 27, 2010, the
President of the United States signed the Small Business Jobs Act of
2010 (Jobs Act). The Jobs Act directs SBA to conduct a detailed review
of all size standards and to make appropriate adjustments to reflect
market conditions. Specifically, the Jobs Act requires SBA to conduct a
detailed review of at least one-third of all size standards during
every 18-month period from the date of its enactment. In addition, the
Jobs Act requires that SBA conduct a review of all size standards not
less frequently than once every 5 years thereafter. Reviewing existing
small business size standards and making appropriate adjustments based
on current data are also consistent with Executive Order 13563 on
improving regulation and regulatory review.
Rather than review all size standards at one time, SBA has adopted
a more manageable approach of reviewing a group of industries within an
NAICS Sector. An NAICS Sector generally consists of 25 to 75
industries, except for the manufacturing sector, which has considerably
more. Once SBA completes its review of size standards for industries in
an NAICS Sector, it will issue a proposed rule to revise size standards
for those industries for which currently available data and other
relevant factors support doing so.
Below is a discussion of SBA's size standards methodology for
establishing receipts based size standards, which SBA applied to this
proposed rule, including analyses of industry structure, Federal
procurement trends and other factors for industries reviewed in this
proposed rule, the impact of the proposed revisions to size standards
on Federal small business assistance, and the evaluation of whether a
revised size standard would exclude dominant firms from being
considered small.
Size Standards Methodology
SBA has developed a ``Size Standards Methodology'' for developing,
reviewing and modifying size standards when necessary. SBA has
published the document on its Web site at http://www.sba.gov/size for
public review and comments and included it, as a supporting document,
in the electronic docket for this proposed rule at http://www.regulations.gov. SBA does not apply all features of its ``Size
Standards Methodology'' to all industries because not all are
appropriate. For example, since this proposed rule covers all
industries with receipts based size standards in NAICS Sector 61, the
methodology described here applies to establishing receipts based
standards. However, the methodology is made available in its entirety
for parties who have an interest in SBA's overall approach to
establishing, evaluating and modifying small business size standards.
SBA always explains its analysis in individual proposed and final rules
relating to size standards for specific industries.
SBA welcomes comments from the public on a number of issues that it
raises in its ``Size Standards Methodology,'' such as suggestions on
alternative approaches to establishing and modifying size standards,
whether there are alternative or additional factors that SBA should
consider, whether SBA's approach to small business size standards makes
sense in the current economic environment, whether SBA's use of anchor
size standards is appropriate in the current economy, whether there are
gaps in SBA's methodology because of the lack of comprehensive data,
and whether there are other facts or issues that SBA should consider.
Comments on SBA's methodology should be submitted via (1) The Federal
eRulemaking Portal: http://www.regulations.gov; the docket number is
SBA-2009-0008; follow the instructions for submitting comments; or (2)
Mail/Hand Delivery/Courier: Khem R. Sharma, Ph.D., Chief, Size
Standards Division, 409 Third Street SW., Mail Code 6530, Washington,
DC 20416. As with comments received to this and other proposed rules,
SBA will post all comments on its methodology on http://www.regulations.gov. As of November 15, 2011, SBA has received seven
comments to its ``Size Standards Methodology.'' The comments are
available to the public at http://www.regulations.gov. SBA continues to
welcome comments on its methodology from interested parties.
Congress granted SBA's Administrator discretion to establish
detailed small business size standards. 15 U.S.C. 632(a)(2). Section
3(a)(3) of the Small Business Act (15 U.S.C. 632(a)(3)) requires that
``* * * the [SBA] Administrator shall ensure that the size standard
varies from industry to industry to the extent necessary to reflect the
differing characteristics of the various industries and consider other
factors deemed to be relevant by the Administrator.'' Accordingly, the
economic structure of an industry is the basis for developing and
modifying small business size standards. SBA identifies the small
business segment of an industry by examining data on the economic
characteristics defining the industry structure itself (as described
below). In addition to analyzing an industry's structure when it
establishes small business size standards, SBA considers current
economic conditions, together with its own mission, program objectives,
and the Administration's current policies, suggestions from industry
groups and Federal agencies, and public comments on the proposed rule.
SBA also examines whether a size standard based on industry and other
relevant data successfully excludes businesses that are dominant in the
industry. This proposed rule affords the public an opportunity to
review and comment on SBA's proposals to revise size standards in NAICS
Sector 61, as well as on the data and methodology it uses to evaluate
and revise a size standard.
Industry Analysis
For the current comprehensive size standards review, SBA has
established three ``base'' or ``anchor'' size standards: $7 million in
average annual receipts for industries that have receipts based size
standards, 500 employees for manufacturing and other industries that
have employee based size standards (except for Wholesale Trade), and
100 employees for industries in the Wholesale Trade Sector. SBA
established 500 employees as the anchor
[[Page 70669]]
size standard for manufacturing industries at its inception in 1953.
Shortly thereafter SBA established $1 million in average annual
receipts as the anchor size standard for nonmanufacturing industries.
SBA has periodically increased the receipts based anchor size standard
for inflation, and it stands today at $7 million. Since 1986, the size
standard for all industries in the Wholesale Trade Sector has been 100
employees for SBA financial assistance and for most other Federal
programs. However, NAICS codes for Wholesale Trade Industries (NAICS
Sector 42) and their 100 employee size standards do not apply to
Federal procurement programs. Rather, for Federal procurement the size
standard for all industries in Wholesale Trade and for all industries
in Retail Trade (NAICS Sector 44-45) is 500 employees under SBA's
nonmanufacturer rule (13 CFR 121.406(b)).
These long-standing anchor size standards have stood the test of
time and gained legitimacy through practice and general public
acceptance. An anchor size standard is neither a minimum nor a maximum.
It is a common size standard for a large number of industries that have
similar economic characteristics and serves as a reference point in
evaluating size standards for individual industries. SBA uses the
anchor in lieu of trying to establish precise small business size
standards for each industry. Otherwise, theoretically, the number of
size standards might be as high as the number of industries for which
SBA establishes size standards (1,141). Furthermore, the data SBA
analyzes are static, while the U.S. economy is not. Hence, absolute
precision is impossible. Therefore, SBA presumes an anchor size
standard is appropriate for a particular industry unless that industry
displays economic characteristics that are considerably different from
others with the same anchor size standard.
When evaluating a size standard, SBA compares the economic
characteristics of the specific industry under review to the average
characteristics of industries with one of the three anchor size
standards (referred to as ``anchor comparison group''). This allows SBA
to assess the industry structure and to determine whether the industry
is appreciably different from the other industries in the anchor
comparison group. If the characteristics of a specific industry under
review are similar to the average characteristics of the anchor
comparison group, the anchor size standard is considered appropriate
for that industry. SBA may consider adopting a size standard below the
anchor when (1) All or most of the industry characteristics are
significantly smaller than the average characteristics of the anchor
comparison group or (2) other industry considerations strongly suggest
that the anchor size standard would be an unreasonably high size
standard for the industry.
If the specific industry's characteristics are significantly higher
than those of the anchor comparison group, then a size standard higher
than the anchor size standard may be appropriate. The larger the
differences are between the characteristics of the industry under
review and those in the anchor comparison group, the larger will be the
difference between the appropriate industry size standard and the
anchor size standard. To determine a size standard above the anchor
size standard, SBA analyzes the characteristics of a second comparison
group. For industries with receipts based size standards, including
those in NAICS Sector 61 that are reviewed in this proposed rule, SBA
has developed a second comparison group consisting of industries with
the highest levels of receipts based size standards. To determine the
level of a size standard above the anchor size standard, SBA analyzes
the characteristics of this second comparison group. The size standards
for this group of industries range from $23 million to $35.5 million in
average annual receipts, with the weighted average size standard for
the group being $29 million. SBA refers to this comparison group as the
``higher level receipts based size standard group.''
The primary factors that SBA evaluates when analyzing the
structural characteristics of an industry include average firm size,
startup costs and entry barriers, industry competition, and
distribution of firms by size. SBA also evaluates, as an additional
primary factor, the impact that revising size standards might have on
Federal contracting assistance to small businesses. These are,
generally, the five most important factors SBA examines when
establishing or revising a size standard for an industry. In addition,
SBA considers and evaluates other information that it believes is
relevant to a particular industry (such as technological changes,
growth trends, SBA financial assistance and other program factors,
etc.). The SBA also considers impacts of size standard revisions on
eligibility for Federal small business assistance, current economic
conditions, the Administration's policies, and suggestions from
industry groups and Federal agencies. Public comments on a proposed
rule also provide important additional information. SBA thoroughly
reviews all public comments before making a final decision on its
proposed size standards. Below are brief descriptions of each of the
five primary factors that SBA has evaluated for each industry in NAICS
Sector 61 being reviewed in this proposed rule. A more detailed
description of this analysis is provided in SBA ``Size Standards
Methodology,'' available at http://www.sba.gov/size.
1. Average firm size. SBA computes two measures of average firm
size: Simple average and weighted average. For industries with receipts
based size standards, the simple average is the total receipts of the
industry divided by the total number of firms in the industry. The
weighted average firm size is the sum of weighted simple averages in
different receipts size classes, where weights are the shares of total
industry receipts for respective size classes. The simple average
weighs all firms within an industry equally, regardless of their size.
The weighted average overcomes that limitation by giving more weight to
larger firms.
If the average firm size of an industry under review is
significantly higher than the average firm size of industries in the
anchor comparison industry group, this will generally support a size
standard higher than the anchor size standard. Conversely, if the
industry's average firm size is similar to or significantly lower than
that of the anchor comparison industry group, it will be a basis to
adopt the anchor size standard, or in rare cases, a standard lower than
the anchor.
2. Startup costs and entry barriers. Startup costs reflect a firm's
initial size in an industry. New entrants to an industry must have
sufficient capital and other assets to start and maintain a viable
business. If new firms entering a particular industry have greater
capital requirements than firms in industries in the anchor comparison
group, this can be a basis for establishing a size standard higher than
the anchor standard. In lieu of data on actual startup costs, SBA uses
average assets as a proxy to measure the capital requirements for new
entrants to an industry.
To calculate average assets, SBA begins with the total sales to
total assets ratio for an industry from the Risk Management
Association's Annual Statement Studies. SBA then applies these ratios
to the average receipts of firms in that industry. An industry with
average assets that are significantly higher than those of the anchor
comparison group is likely to have higher startup costs; this in turn
will
[[Page 70670]]
support a size standard higher than the anchor. Conversely, an industry
with average assets that are similar to or significantly lower than
those of the anchor comparison group is likely to have lower startup
costs; this in turn will support adoption of the anchor size standard,
or in rare cases, one lower than the anchor.
3. Industry competition. Industry competition is generally measured
by the share of total industry receipts generated by the largest firms
in an industry. SBA generally evaluates the share of industry receipts
generated by the four largest firms in each industry. This is referred
to as the ``four-firm concentration ratio,'' a commonly used economic
measure of market competition. SBA compares the four-firm concentration
ratio for an industry under review to the average four-firm
concentration ratio for industries in the anchor comparison group. If a
significant share of economic activity within the industry is
concentrated among a few relatively large companies, all else being
equal, SBA will establish a size standard higher than the anchor size
standard. SBA does not consider the four-firm concentration ratio as an
important factor in assessing a size standard if its value for an
industry under review is less than 40 percent. For industries in which
the four-firm concentration ratio is 40 percent or more, SBA examines
the average size of the four largest firms in determining a size
standard.
4. Distribution of firms by size. SBA examines the shares of
industry total receipts accounted for by firms of different receipts
and employment size classes in an industry. This is an additional
factor SBA evaluates in assessing competition within an industry. If
most of an industry's economic activity is attributable to smaller
firms, this indicates that small businesses are competitive in that
industry. This supports adopting the anchor size standard. If most of
an industry's economic activity is attributable to larger firms, this
indicates that small businesses are not competitive in that industry.
This will support adopting a size standard above the anchor.
Concentration is a measure of inequality of distribution. To
determine the degree of inequality of distribution in an industry, SBA
computes the Gini coefficient, using the Lorenz curve. The Lorenz curve
presents the cumulative percentages of units (firms) along the
horizontal axis and the cumulative percentages of receipts (or other
measures of size) along the vertical axis. (For further detail, please
refer to SBA's ``Size Standards Methodology'' on SBA's Web site at
http://www.sba.gov/size.) Gini coefficient values vary from zero to
one. If receipts are distributed equally among all the firms in an
industry, the value of the Gini coefficient will equal zero. If an
industry's total receipts are attributed to a single firm, the Gini
coefficient will equal one.
SBA compares the Gini coefficient value for an industry under
review with that for industries in the anchor comparison group. If an
industry shows a higher Gini coefficient value than industries in the
anchor comparison industry group this may, all else being equal,
warrant a higher size standard than the anchor. Conversely, if an
industry's Gini coefficient is similar to or lower than that for the
anchor group, the anchor standard, or in some cases a standard lower
than the anchor, may be adopted.
5. Impact on Federal contracting and SBA loan programs. SBA
examines the impact a size standard change may have on Federal small
business assistance. This most often focuses on the share of Federal
contracting dollars awarded to small businesses in the industry in
question. In general, if the small business share of Federal
contracting in an industry with significant Federal contracting is
appreciably less than the small business share of the industry's total
receipts, there is justification for considering a size standard higher
than the existing size standard. The disparity between the small
business Federal market share and the industry-wide small business
share may have a variety of causes, such as extensive administrative
and compliance requirements associated with Federal contracts,
different skill set requirements for Federal contracts as compared to
typical commercial contracting work, and the size of Federal contracts.
These, as well as other factors, are likely to influence the type of
firms within an industry that compete for Federal contracts. By
comparing the Federal contracting small business share with the
industry-wide small business share, SBA includes in its size standards
analysis the latest Federal contracting trends. This analysis may
indicate a size standard larger than the current standard.
SBA considers Federal procurement trends in the size standards
analysis only if (1) The small business share of Federal contracting
dollars is at least 10 percent lower than the small business share of
total industry receipts and (2) total Federal contracting averages $100
million or more during the latest three fiscal years. These thresholds
reflect a significant level of contracting where a revision to a size
standard may have an impact on expanding small business opportunities.
Besides the impact on small business Federal contracting, SBA also
evaluates the impact of a proposed size standard on SBA's loan
programs. For this, SBA examines the volume of SBA guaranteed loans
within an industry and the size of firms obtaining those loans. This
allows SBA to assess whether the existing or the proposed size standard
for a particular industry may restrict the level of financial
assistance to small firms. If the analysis shows that the current size
standards have impeded financial assistance to small businesses, higher
size standards are supportable. However, if under current size
standards small businesses have been receiving significant amounts of
financial assistance through SBA's loan programs, or if the financial
assistance has been provided mainly to businesses that are much smaller
than the existing size standard, this factor is not considered for
determining the size standard.
Sources of Industry and Program Data
SBA's primary source of industry data for most industries covered
by this proposed rule was a special tabulation of the data from 2007
Economic Census (see http://www.census.gov/econ/census07/) prepared by
the U.S. Bureau of the Census (Census Bureau) for SBA. The three
industries, namely NAICS 611110, NAICS 611210, and NAICS 611310, are
not covered by the Economic Census. The data for these industries were
based on the 2007 County Business Patterns (see http://www.census.gov/econ/cbp/). The special tabulation provides SBA with data on the number
of firms, number of establishments, number of employees, annual
payroll, and annual receipts of companies by NAICS Sector (2-digit
level), Subsector (3-digit level), Industry Group (4-digit level),
Industry (6-digit level). These data are arrayed by various classes of
firms' size based on the overall number of employees and receipts of
the entire enterprise (all establishments and affiliated firms) from
all industries. The special tabulation enables SBA to evaluate average
firm size, the four-firm concentration ratio, and distribution of firms
by receipts and employment size.
In some cases, where data were not available due to disclosure
prohibitions, SBA either estimated missing values using available
relevant data or examined data at a higher level of industry
aggregation, such as at the NAICS 2-digit (Sector), 3-digit
[[Page 70671]]
(Subsector), or 4-digit (Industry Group) level. In some instances, SBA
analysis was based only on those factors for which data were available
or estimates of missing values were possible.
The data from the Census Bureau's tabulation are limited to the 6-
digit NAICS industry level and hence do not provide economic
characteristics at the sub-industry level. Thus, when establishing,
reviewing, or modifying size standards at the sub-industry level (that
is, one of the ``exceptions'' in SBA's table of size standards), SBA
evaluates the data from the U.S. General Service Administration's (GSA)
Federal Procurement Data System--Next Generation (FPDS-NG) and Central
Contractor Registration (CCR) databases following a two-step procedure.
First, using FPDS-NG, SBA identifies product service codes (PSCs) that
correspond to specific sub-industry activities or ``exceptions'' and
then identifies firms that are active in Federal contracting involving
those PSCs. Then, SBA obtains those firms' revenue and employment data
from the CCR database. SBA uses that data to evaluate the actual size
of businesses that FPDS-NG identifies for those procurements. In this
proposed rule, SBA applied this approach to determine industry and
Federal contracting factors for ``Job Corps Centers,'' which is an
exception under NAICS 611519, Other Technical and Trade Schools.
To calculate average assets, SBA used total sales to total assets
ratios from the Risk Management Association's Annual Statement Studies
from years 2007 to 2009.
To evaluate Federal contracting trends, SBA examined data on
Federal contract awards for fiscal years 2007 to 2009. The data are
available from the GSA's FPDS-NG database.
To assess the impact on financial assistance to small businesses,
SBA examined data on its own guaranteed loan programs for fiscal years
2008 to 2010.
Data sources and estimation procedures that SBA uses in its size
standards analysis are documented in detail in the SBA's ``Size
Standards Methodology'' White Paper, which is available at http://www.sba.gov/size.
Dominance in Field of Operation
Section 3(a) of the Small Business Act (15 U.S.C. 632(a)) defines a
small business concern as one that is (1) Independently owned and
operated, (2) not dominant in its field of operation, and (3) within a
specific small business size definition or size standard established by
the SBA Administrator. SBA considers as part of its evaluation whether
a business concern at a proposed size standard would be dominant in its
field of operation. For this, SBA generally examines the industry's
market share of firms at the proposed standard. Market share and other
factors may indicate whether a firm can exercise a major controlling
influence on a national basis in an industry where a significant number
of business concerns are engaged. If a contemplated size standard
includes a dominant firm, SBA will consider a lower size standard to
exclude the dominant firm from being defined as small.
Selection of Size Standards
To simplify size standards, for the ongoing comprehensive review of
receipts based size standards, SBA has proposed to select size
standards from a limited number of levels. For many years, SBA has been
concerned about the complexity of determining small business status
caused by a large number of varying receipts based size standards (see
69 FR 13130 (March 4, 2004) and 57 FR 62515 (December 31, 1992)). At
the beginning of the current comprehensive size standards review, there
were 31 different levels of receipts based size standards. They ranged
from $0.75 million to $35.5 million, and many of them applied to one or
only a few industries. SBA believes that size standards with such a
large number of small variations among them are both unnecessary and
difficult to justify analytically. To simplify managing and using size
standards, SBA proposes that there be fewer size standard levels. This
will produce more common size standards for businesses operating in
related industries. This will also result in greater consistency among
the size standards for industries that have similar economic
characteristics.
SBA proposes, therefore, to apply one of eight receipts based size
standards to each industry in NAICS Sector 61. All size standards in
NAICS Sector 61 are based on annual receipts. The eight ``fixed''
receipts based size standard levels are $5 million, $7 million, $10
million, $14 million, $19 million, $25.5 million, $30 million, and
$35.5 million. To establish these eight receipts based size standard
levels SBA considered the current minimum, the current maximum, and the
most commonly used current receipts based size standards. Currently,
the most commonly used receipts based size standards cluster around the
following: $2.5 million to $4.5 million, $7 million, $9 million to $10
million, $12.5 million to $14 million, $25 million to $25.5 million,
and $33.5 million to $35.5 million. SBA selected $7 million as one of
eight fixed levels of receipts based size standards because it is an
anchor standard for receipts based standards. The lowest or minimum
receipts based size level will be $5 million. Other than the standards
for agriculture and those based on commissions (such as real estate
brokers and travel agents), $5 million will include those industries
that at the start of the comprehensive size standards review had the
lowest receipts based standards, which ranged from $2 million to $4.5
million. Among the higher level size clusters, SBA has set four fixed
levels, namely: $10 million, $14 million, $25.5 million, and $35.5
million. Because there are large intervals between some of the fixed
levels, SBA also established two intermediate levels, namely $19
million between $14 million and $25.5 million, and $30 million between
$25.5 million and $35.5 million. These two intermediate levels reflect
roughly the same proportional differences as between the other two
successive levels.
Evaluation of Industry Structure
SBA evaluated the structure of each of the 17 industries and one
sub-industry in NAICS Sector 61, Educational Services, to assess the
appropriateness of the current size standards. As described above, SBA
compared data on the economic characteristics of each industry in NAICS
Sector 61 to the average characteristics of industries in two
comparison groups. The first comparison group consists of all
industries with $7 million size standards and is referred to as the
``receipts based anchor comparison group.'' Because the goal of SBA's
size standards review is to assess whether a specific industry's size
standard should be the same as or different from the anchor size
standard, this is the most logical group of industries to analyze. In
addition, this group includes a sufficient number of firms to provide a
meaningful assessment and comparison of industry characteristics.
If the characteristics of an industry under review are similar to
the average characteristics of industries in the anchor comparison
group, the anchor size standard is generally considered appropriate for
that industry. If an industry's structure is significantly different
from industries in the anchor group, a size standard lower or higher
than the anchor size standard might be selected. The level of the new
size standard is based on the difference between the characteristics of
the anchor comparison group and a second industry comparison group. As
described above, the second comparison
[[Page 70672]]
group for receipts based standards consists of industries with the
highest receipts based size standards, ranging from $23 million to
$35.5 million. The average size standard for this group is $29 million.
SBA refers to this group of industries as the ``higher level receipts
based size standard comparison group.'' SBA determines differences in
industry structure between an industry under review and the industries
in the two comparison groups by comparing data on each of the industry
factors, including average firm size, average assets size, the four-
firm concentration ratio, and the Gini coefficient of distribution of
firms by size. Table 1 shows two measures of the average firm size
(simple and weighted), average assets size, the four-firm concentration
ratio, average receipts of the four largest firms, and the Gini
coefficient for both anchor level and higher level comparison groups
for receipts based size standards.
Table 1--Average Characteristics of Receipts Based Comparison Groups
--------------------------------------------------------------------------------------------------------------------------------------------------------
Average firm size ($ million) Average
------------------------------------ Average assets Four-firm receipts of four
Receipts based comparison group Weighted size ($ concentration largest firms Gini coefficient
Simple average average million) ratio (%)* ($ million)*
--------------------------------------------------------------------------------------------------------------------------------------------------------
Anchor Level................................ 1.32 19.63 0.84 16.6 196.4 0.693
Higher Level................................ 5.07 116.84 3.20 32.1 1,376.0 0.830
--------------------------------------------------------------------------------------------------------------------------------------------------------
* To be used for industries with a four-firm concentration ratio of 40% or greater.
Derivation of Size Standards Based on Industry Factors
For each industry factor in Table 1, SBA derives a separate size
standard based on the differences between the values for an industry
under review and the values for the two comparison groups. If the
industry value for a particular factor is near the corresponding factor
for the anchor comparison group, SBA will consider the $7 million
anchor size standard appropriate for that factor.
An industry factor significantly above or below the anchor
comparison group will generally warrant a size standard for that
industry above or below the $7 million anchor. The level of the new
size standard in these cases is based on the proportional difference
between the industry value and the values for the two comparison
groups.
For example, if an industry's simple average receipts are $3.3
million, that would support a $19 million size standard. The $3.3
million level is 52.8 percent between the average firm size of $1.32
million for the anchor comparison group and $5.07 million for the
higher level comparison group (($3.30 million-$1.32 million) / ($5.07
million-$1.32 million) = 0.528 or 52.8%). This proportional difference
is applied to the difference between the $7 million anchor size
standard and average size standard of $29 million for the higher level
size standard group and then added to $7 million to estimate a size
standard of $18.62 million ([{$29.0 million-$7.0 million{time} *
0.528] + $7.0 million = $18.62 million). The final step is to round the
estimated $18.62 million size standard to the nearest fixed size
standard, which in this example is $19 million. SBA applies the above
calculation to derive a size standard for each industry factor.
Detailed formulas involved in these calculations are presented in SBA's
``Size Standards Methodology,'' which is available on its Web site at
http://www.sba.gov/size. (However, it should be noted that the figures
in the ``Size Standards Methodology'' White Paper are based on 2002
Economic Census data and are different from those presented in this
proposed rule. That is because when SBA prepared its ``Size Standards
Methodology,'' the 2007 Economic Census data were not yet available).
Table 2 (below) shows ranges of values for each industry factor and the
levels of size standards supported by those values.
Table 2--Values of Industry Factors and Supported Size Standards
----------------------------------------------------------------------------------------------------------------
Or if average
Or if weighted Or if average receipts of Then size
If simple average receipts average assets size is largest four Or if Gini standard is
size is ($ million) receipts size ($ million) firms is ($ coefficient is ($ million)
is ($ million) million)
----------------------------------------------------------------------------------------------------------------
< 1.15...................... < 15.22........ < 0.73......... < 142.8........ < 0.686........ 5.0
1.15 to 1.57................ 15.22 to 26.26. 0.73 to 1.00... 142.8 to 276.9. 0.686 to 0.702. 7.0
1.58 to 2.17................ 26.27 to 41.73. 1.01 to 1.37... 277.0 to 464.5. 0.703 to 0.724. 10.0
2.18 to 2.94................ 41.74 to 61.61. 1.38 to 1.86... 464.6 to 705.8. 0.725 to 0.752. 14.0
2.95 to 3.92................ 61.62 to 87.02. 1.87 to 2.48... 705.9 to 0.753 to 0.788. 19.0
1,014.1.
3.93 to 4.86................ 87.03 to 111.32 2.49 to 3.07... 1,014.2 to 0.789 to 0.822. 25.5
1,309.0.
4.87 to 5.71................ 111.33 to 3.08 to 3.61... 1,309.1 to 0.823 to 0.853. 30.0
133.41. 1,577.1.
> 5.71...................... > 133.41....... > 3.61......... > 1,577.1...... > 0.853........ 35.5
----------------------------------------------------------------------------------------------------------------
Derivation of Size Standard Based on Federal Contracting Factor
Besides industry structure, SBA also evaluates Federal contracting
data to assess how successful small businesses are in getting Federal
contracts under existing size standards. For the current comprehensive
size standards review, for industries where the small business share of
total Federal contracting dollars is between 10 and 30 percent lower
than their shares in total industry receipts, SBA has designated a size
standard at one level higher than their current size standard. For
industries where the small business share of total Federal contracting
dollars is more than 30 percent lower than their shares in total
industry receipts, SBA has designated a size standard at two levels
higher than the current size standard.
Because of the complex relationships among a number of variables
affecting small business participation in the
[[Page 70673]]
Federal marketplace, SBA has chosen not to designate a size standard
for the Federal contracting factor alone that is more than two levels
above the current size standard. SBA believes that a larger adjustment
to size standards based on Federal contracting activity should be based
on a more detailed analysis of the impact of any subsequent revision to
the current size standard. In limited situations, however, SBA may
conduct a more extensive examination of Federal contracting experience.
This may enable SBA to support a different size standard than indicated
by this general rule and take into consideration significant and unique
aspects of small business competitiveness in the Federal contract
market. SBA welcomes comments on its methodology for incorporating the
Federal contracting factor in the size standard analysis and
suggestions for alternative methods and other relevant information on
small business experience in the Federal contract market.
Of the 17 industries reviewed in this proposed rule, seven
industries averaged $100 million or more annually in Federal
contracting during fiscal years 2007 to 2009. Also, a review of Federal
contracts awarded to the sub-industry Job Corps Centers during fiscal
year 2009 indicates that the sub-industry received more than $100
million in Federal contracts as well. The Federal contracting factor
was significant (i.e., the difference between the small business share
of total industry receipts and the small business share of Federal
contracting dollars was 10 percentage points or more) in three of those
seven industries and a separate size standard was derived for that
factor for each of them.
New Size Standards Based on Industry and Federal Contracting Factors
Table 3 shows the results of analyses of industry and Federal
contracting factors for each industry covered by this proposed rule.
Many of the NAICS industries in columns 2, 3, 4, 6, 7, and 8 show two
numbers. The upper number is the value for the industry or Federal
contracting factor shown on the top of the column, and the lower number
is the size standard supported by that factor. For the four-firm
concentration ratio, SBA estimates a size standard if its value is 40
percent or more. If the four-firm concentration ratio for an industry
is less than 40 percent, there is no size standard estimated for that
factor. If the four-firm concentration ratio is more than 40 percent,
SBA indicates in column 6 the average size of the industry's top four
firms together with a size standard based on that average. Column 9
shows a calculated new size standard for each industry. This is the
average of the size standards supported by each factor and rounded to
the nearest fixed size level. Analytical details involved in the
averaging procedure are described in SBA ``Size Standard Methodology.''
For comparison with the new standards, the current size standards are
in column 10 of Table 3.
Table 3--Size Standards Supported by Each Factor for Each Industry
[Millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
(3) (6) Four- (9) (10)
(2) Simple Weighted (4) Average (5) Four- firm (8) Federal Calculated Current
(1) NAICS code/ NAICS industry average average assets firm ratio average (7) Gini contract size size
title firm size firm size size ($ (%) size ($ coefficient factor (%) standard ($ standard ($
($ million) ($ million) million) million) million) million)
--------------------------------------------------------------------------------------------------------------------------------------------------------
611110--Elementary and Secondary $3.3 $14.7 ........... 1.7 $259.3 0.668 ........... $10.0 $7.0
Schools...........................
19.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611210--Junior Colleges............ 14.9 62.0 ........... 25.4 443.4 0.735 ........... 19.0 7.0
35.5 19.0 ........... ........... ........... $14.0 ........... ........... ...........
611310--Colleges, Universities and 67.5 324.3 ........... 9.6 3,959.4 0.779 0.8 25.5 7.0
Professional Schools..............
35.5 35.5 ........... ........... ........... $19.0 ........... ........... ...........
611410--Business and Secretarial 1.3 6.2 ........... 19.8 20.2 0.668 ........... 7.0 7.0
Schools...........................
7.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611420--Computer Training.......... 1.2 11.3 ........... 17.0 104.5 0.741 23.3 10.0 7.0
7.0 5.0 ........... ........... ........... $14.0 ........... ........... ...........
611430--Professional and Management 1.3 12.8 0.9 9.9 178.2 0.739 -17.7 10.0 7.0
Development Training..............
7.0 5.0 7.0 ........... ........... $14.0 $10.0 ........... ...........
611511--Cosmetology and Barber 0.8 6.4 ........... 11.7 35.0 0.546 ........... 5.0 7.0
Schools...........................
5.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611512--Flight Training............ 2.6 56.9 ........... 52.0 282.0 0.836 -17.3 19.0 25.5
14.0 14.0 ........... ........... 10.0 $30.0 $30.0 ........... ...........
611513--Apprenticeship Training.... 1.0 5.7 ........... 10.2 31.9 0.612 ........... 5.0 7.0
5.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611519--Other Technical and Trade 1.8 19.4 1.2 17.8 267.4 0.778 -13.8 14.0 7.0
Schools...........................
10.0 7.0 10.0 ........... ........... $19.0 $10.0 ........... ...........
Except--Job Corps Centers.......... 585.8 1,907.3 ........... 94.0 2,891.2 0.690 20.0 30.0 35.5
35.5 35.5 ........... ........... 35.5 $7.0 ........... ........... ...........
611610--Fine Arts Schools.......... 0.3 1.7 0.1 3.2 26.3 0.325 ........... 5.0 7.0
5.0 5.0 5.0 ........... ........... $5.0 ........... ........... ...........
611620--Sports and Recreation 0.3 1.5 ........... 4.0 36.8 0.327 ........... 5.0 7.0
Instruction.......................
5.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611630--Language Schools........... 0.7 52.8 ........... 31.1 66.7 0.704 ........... 10.0 7.0
5.0 14.0 ........... ........... ........... $10.0 ........... ........... ...........
611691--Exam Preparation and 0.6 43.9 ........... 29.5 259.1 0.642 ........... 7.0 7.0
Tutoring..........................
5.0 14.0 ........... ........... ........... $5.0 ........... ........... ...........
611692--Automobile Driving Schools. 0.3 2.2 ........... 8.6 13.8 0.370 ........... 5.0 7.0
[[Page 70674]]
5.0 5.0 ........... ........... ........... $5.0 ........... ........... ...........
611699--All Other Miscellaneous 1.0 21.5 0.7 27.1 242.4 0.758 3.2 10.0 7.0
Schools and Instruction...........
5.0 7.0 7.0 ........... ........... $19.0 ........... ........... ...........
611710--Educational Support 1.5 39.2 1.2 21.2 467.1 0.811 -5.1 14.0 7.0
Services..........................
7.0 10.0 10.0 ........... ........... $25.5 ........... ........... ...........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Special Considerations
Job Corps Centers
The current size standard for Federal contracts for Job Corps
Centers (``exception'' to NAICS code 611519) is $35.5 million in
average annual receipts. For Federal procurement programs, this size
standard applies to Federal contracts that meet specific criteria. The
criteria that constitute a Jobs Corps Center contract or company are
detailed in Footnote 16 to SBA's table of size standards (13 CFR
121.201): ``For classifying a Federal Procurement, the purpose of the
solicitation must be for the management and operation of a U.S.
Department of Labor Job Corps Centers. The activities involved include
admissions activities, life skills training, educational activities,
comprehensive career preparation activities, career development
activities, career transition activities, as well as the management and
support functions and services needed to operate and maintain the
facility. For SBA assistance as a small business concern, other than
for Federal Government procurements, a concern must be primarily
engaged in providing the services to operate and maintain Federal Job
Corps Centers.''
To determine if the current $35.5 million size standard is
appropriate, SBA evaluated average firm size, market concentration, and
size distribution of firms involved in the Job Corps Centers sub-
industry using the data from FPDS-NG and CCR and the procedure
described under the section of this rule entitled ``Sources of Industry
and Program Data.'' Based on the data for fiscal year 2009, Federal
contracts averaged more than $100 million annually, but the small
business share of Federal contracting dollars was larger than the small
business share of total receipts. Therefore, the Federal contracting
factor was not important for the evaluation of this sub-industry. The
results, as shown in Table 3, support decreasing the current size
standard to $30 million. However, for reasons discussed below, SBA has
proposed to retain the $35.5 million size standard.
Evaluation of SBA Loan Data
Before deciding on an industry's size standard, SBA also considers
the impact of new or revised standards on SBA's loan programs.
Accordingly, SBA examined its 7(a) and 504 Loan Program data for fiscal
years 2008 to 2010 to assess whether the existing or proposed size
standards need further adjustments to ensure credit opportunities for
small businesses through those programs. For the industries reviewed,
the data show that it is mostly businesses much smaller than the
current size standards that utilize SBA's 7(a) and 504 loans.
Therefore, no size standard in NAICS Sector 61, Educational Services,
needs an adjustment based on this factor.
Proposed Changes to Size Standards
Table 4 (below) summarizes the results of SBA analyses of industry
and federal procurement factors from Table 3. The results support
increases in size standards for nine industries, decreases for six
industries and one sub-industry (exception to NAICS 611519, Job Corps
Centers), and no changes for two industries.
However, lowering small business size standards is not in the best
interests of small businesses under the current economic environment.
The U.S. economy was in recession from December 2007 to June 2009, the
longest and deepest of any recessions since World War II. The economy
lost more than eight million non-farm jobs during 2008-2009. In
response, Congress passed and the President signed the American
Recovery and Reinvestment Act of 2009 (Recovery Act) to promote
economic recovery and to preserve and create jobs. Although the
recession officially ended in June 2009, the unemployment rate was 9.4
percent or higher from May 2009 to December 2010. It somewhat moderated
to 8.8 percent in March 2011, but it has been 9 percent or higher for
the May-July quarter. The unemployment rate is forecast to remain at
around 9 percent through the end of 2011. More recently, Congress
passed and the President signed the Small Business Jobs Act of 2010
(Jobs Act) to promote small business job creation. The Jobs Act puts
more capital into the hands of entrepreneurs and small business owners;
includes recommendations from the President's Task Force on Federal
Contracting Opportunities for Small Business that strengthens small
businesses' ability to compete for contracts and creates a better
playing field for small businesses; building on the President's
National Export Initiative, promotes small business exporting; expands
training and counseling for small businesses; and provides $12 billion
in tax relief to help small businesses invest in their firms and create
jobs.
Reducing the size standard for Job Corps Centers (the exception to
NAICS 511619) would result in significant jobs losses in that industry,
and it would adversely affect those unemployed and underemployed people
that Job Corps Centers serve. This is another reason why SBA is not
lowering the size standard for this industry.
[[Page 70675]]
Table 4--Summary of Size Standards Analysis
----------------------------------------------------------------------------------------------------------------
Calculated Current size
NAICS code NAICS industry title size standard standard ($
($ million) million)
----------------------------------------------------------------------------------------------------------------
611110.................................. Elementary and Secondary Schools...... $10.0 $7.0
611210.................................. Junior Colleges....................... 19.0 7.0
611310.................................. Colleges, Universities and 25.5 7.0
Professional Schools.
611410.................................. Business and Secretarial Schools...... 7.0 7.0
611420.................................. Computer Training..................... 10.0 7.0
611430.................................. Professional and Management 10.0 7.0
Development Training.
611511.................................. Cosmetology and Barber Schools........ 5.0 7.0
611512.................................. Flight Training....................... 19.0 25.5
611513.................................. Apprenticeship Training............... 5.0 7.0
611519.................................. Other Technical and Trade Schools..... 14.0 7.0
Except.................................. Job Corps Centers..................... 30.0 35.5
611610.................................. Fine Arts Schools..................... 5.0 7.0
611620.................................. Sports and Recreation Instruction..... 5.0 7.0
611630.................................. Language Schools...................... 10.0 7.0
611691.................................. Exam Preparation and Tutoring......... 7.0 7.0
611692.................................. Automobile Driving Schools............ 5.0 7.0
611699.................................. All Other Miscellaneous Schools and 10.0 7.0
Instruction.
611710.................................. Educational Support Services.......... 14.0 7.0
----------------------------------------------------------------------------------------------------------------
Further, lowering size standards would decrease the number of firms
that could participate in Federal financial and procurement assistance
for small businesses. Size standards based solely on analytical results
without any other considerations would cut off currently eligible small
firms from those programs. That would run counter to what SBA and the
Federal government are doing to help small businesses. Reducing size
eligibility for Federal assistance, especially under current economic
conditions, would not preserve or create more jobs; rather, it would
have the opposite effect. Therefore, in this proposed rule, SBA does
not propose to reduce size standards for any industries. For six
industries and one sub-industry for which analyses might support
lowering size standards, SBA proposes to retain the current size
standards. SBA nevertheless invites comments and suggestions on whether
it should lower size standards as suggested by analyses of industry and
program data or retain the current standards for those industries in
view of current economic conditions.
As discussed above, SBA has decided that lowering small business
size standards would be inconsistent with what the Federal government
is doing to stimulate the economy and encourage job growth through the
Recovery Act and Jobs Act. Therefore, for those industries for which
its analyses suggested decreasing their size standards, SBA proposes to
retain the current size standards. Thus, of the 17 industries and one
sub






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