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The final rule implementing the U.S. Small Business Administration (SBA) modification to the method for calculating businesses’ size status goes into effect today, January 6, 2020. The SBA has changed the method for calculating a company’s size from a three-year averaging period to a five-year averaging period. This long-awaited change is intended to provide small businesses with more time to grow before exceeding the applicable size standards and having to compete in the full and open market. The final rule implements the Small Business Runway Extension Act of 2018, which was signed into law on December 17, 2018.

The SBA determines whether a company is a small business for a particular industry – and therefore eligible to participate in programs designed to assist small businesses in receiving federal government contracts – by either looking at its average revenues or the average number of employees it has. Certain procurements are set aside only for small businesses and participants in programs such as the 8(a) Business Development, the Historically Underutilized Business Zones (HUBZone), Service-Disabled Veteran-Owned Small Business, Women-Owned Small Business, and Economically Disadvantaged Women-Owned Small Business programs.

By allowing companies to use a five-year averaging period instead of a three-year averaging period, companies that have increasing annual revenue may be considered small businesses – and therefore be able to bid on contracts set aside for small businesses – for a longer period of time.

Prior to January 6, 2020, the SBA calculated a company’s size by either averaging its revenues over the three most recent years or averaging its number of employees for each of the pay periods for the preceding completed 12 calendar months. During the two-year transition period from January 6, 2020 to January 6, 2022 companies can decide whether to use a three-year averaging period or a five-year averaging period to calculate their size when the size standard is based on revenues (not employees). After January 6, 2020, companies will be required to use a five-year averaging period to calculate their size.

The change does not apply to the SBA Business Loan and Disaster Loan programs. The SBA intends to seek comments at a later date through a separate rulemaking to consider changes to size eligibility for those programs. In addition, the calculation period for employee-based size standards will remain 12 months. The final rule also clarifies how annual receipts should be calculated when a business sells or acquires a segregable division during the applicable period of measurement.

The new regulations can be found at 13 C.F.R. §§ 121.104, 121.106 and 121.903.

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Luis F. Ruiz

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