SBA Ignored Overwhelming Comments on New Size Standards

Press Release

SBA Ignored Overwhelming Comments on New Size Standards

Documents Reveal Overwhelming Support for New Definition of Small Businesses -- SBA Report Was Wrong

September 13, 2004

The Small Business Administration's decision in July to halt the reform of federal size standards that define which American businesses are "small", was 180 degrees wrong, documents show.

The result: Flawed rules that determine eligibility for $100 billion in government small business contracts remain in place, despite an outpouring of support for change.

Documents just obtained through the Freedom of Information Act show that more than 2,500 comments received by the SBA were in favor of lowering the basic size standard for a small business from 500 employees to 100 employees, and fewer than 30 were opposed. Yet the SBA had announced on July 1 that most responders were against changing the standards, and that therefore it was suspending the process. In fact, almost all of the negative comments received by the SBA were directed at other aspects of its 86-page proposal.

" This is an outrageous deception that cheats thousands of legitimate small businesses out of $50 billion a year in government contracts and thwarts the intent of Congress," said Lloyd Chapman, president of the American Small Business League (ASBL). "The SBA should be protecting small businesses, but instead its deceit is helping large corporations and hurting the small companies that are vital to America's economy."

Current rules generally allow companies with up to 500 employees to be classified as "small" and eligible for government contracts set aside for small businesses. The SBA sought comment on an array of changes it proposed in March 2004. The proposal to lower the small business size limit to 100 employees would increase opportunity for 24 million small businesses in the country to win government contracts. "Big corporations with 495 employees are not small businesses in anybody's eyes except the SBA's," Chapman said. "This needs to be fixed."

Comments in favor of reforming size standards came from small businesses across the country, according to the documents kept secret by the SBA but made public following ASBL's Freedom of Information Act filing.

  • "I AGREE with the proposed changes! I am a VERY small business and I have found the existing standards to be a farce," wrote Melina Hansher, principal geologist of Value Environmental Services of Largo, Florida. "…I am tired of trying to compete with so-called 'small businesses' that have multiple offices and more employees than we have voters on Election Day."
  • "As a small high-tech firm we noticed a recent influx of apparently large businesses participating in the small business innovative research (SBIR) program during the past 2 years … These companies are able to push smaller and often more innovative companies out of the competitive arena," wrote Scott Thompson, CEO of RealTronics Corp. of Rapid City, South Dakota. "It is my sincerest hope that you will adopt the proposed ruling to restructure the size standard for small businesses to a cap of 100 employees."
  • "98% of firms in America employee 99 employees or less. These are the firms that Congress intended to receive federal contracts and sub-contracts," wrote Anthony Grimm, president of the Berks County Chamber of Commerce in Reading, Pennsylvania. "…We specifically support proposed changes that would revise the non-manufacturer size standard applicable to Federal procurements from 500 to 100 employees."
  • "I am the owner of a small aerospace engineering and information technology company. I wholeheartedly agree with the proposal to revise the non-manufacturer size standard applicable to Federal procurements from 500 employees to 100 employees," wrote Dr. George W. Davis, president of Emergent Space Technologies, Inc., of Laurel, Maryland.

The American Small Business League will renew its efforts to reform small business size standards this fall.

SBA standards: When size matters


SBA standards: When size matters

Flood of comments prompts SBA to rethink standards change

By Gail Repsher Emery
Washington Technology
July 19, 2004

The Small Business Administration still plans to simplify its small-business size standards despite its recent decision to reassess changes it proposed in March. Thousands of public comments raised significant concerns about the planned changes and led SBA to pull back.

"We are still committed to trying to find ways to simplify the size standards to make them easier to use and understand," said Gary Jackson, SBA's assistant administrator for size standards.

Jackson said SBA will solicit comments on specific options for revising the size standards through an advanced notice of proposed rulemaking, which will be published in the Federal Register this summer. The agency also plans to hold hearings nationwide to discuss changes, Jackson said.

The size standards define what constitutes a small business for the purpose of federal government contracting. Companies that meet the standard in their industries can qualify for SBA loan programs, contracts set aside for small businesses and other federal business-development programs.

SBA earlier this year proposed shrinking the number of size standards from 37 to 10. All the standards would be based on number of employees. Currently, some size standards are based on annual revenue, and others are based on employee count.

Under SBA's proposal, some industries, including information technology, would get both an employee cap and a revenue cap. To be considered small, IT services companies could have no more than $30 million in annual revenue and no more than 150 employees.

After SBA began receiving large volumes of comments on the proposal, the agency in mid-May extended the deadline for comments to July 2, when SBA Administrator Hector Barreto withdrew the rule, saying further assessment was necessary before any changes could be made.

The agency has received about 4,500 comments on its proposal, including 800 since the proposed rule was withdrawn, Jackson said. At least half of the comments support a change in the size standard from 500 to 100 employees for non-manufacturing companies such as resellers, Jackson said.

However, about half of the comments oppose one or more parts of SBA's proposed rule, Jackson said. For example, many executives complained that the proposed 150-employee cap for IT firms would push small companies into large-business status well before they reached the $30 million revenue cap.

hose companies could no longer pursue small-business set-aside contracts nor accept work from large businesses seeking small-business subcontractors, executives said.

Several IT industry groups welcomed SBA's decision to step back temporarily from its rulemaking effort. The House and Senate Small Business Committees and SBA's watchdog Office of Advocacy also had objected to SBA's proposal.

Sen. Olympia Snowe (R-Maine), who leads the Senate Small Business and Entrepreneurship Committee, objected to the proposal because the new standards would reclassify 34,100 small businesses as large businesses.

But SBA said 35,200 businesses could gain small-business eligibility under the new standards, so the net effect would be an increase of 1,110 companies defined as small.

Still, jettisoning more than 34,000 small businesses from the federal marketplace would hurt not only those companies but also the large companies that team with those businesses to meet federal subcontracting goals for small businesses, said Harris Miller, president of the Information Technology Association of America, an Arlington, Va., trade group that opposed SBA's proposal.

Valerie Perlowitz, chairwoman of ITAA's Small Business Subcommittee, said she wasn't surprised SBA temporarily put its rulemaking effort on hold.

"SBA is doing the right thing by trying to streamline the size standards, but it is very difficult to figure out a good methodology when you are dealing with so many different industries," said Perlowitz, president and chief executive officer of Reliable Integration Services Inc., a small IT contractor in Vienna, Va.

That difficulty is why Giovanni Coratolo, director of small business policy at the Washington-based U.S. Chamber of Commerce, said he thinks SBA should revise only certain size standards if necessary, not all of them.

"All fiddling with the rules does is change long-standing standards by which small businesses entered into this [federal contracting] arena and developed strategies based on those rules," Coratolo said.

"I would like to see the rules stay the same, unless they can make a case why they should be changing a specific size standard. Simplicity is not a good reason."

Perlowitz, on the other hand, said she'd like to see SBA create a grandfather clause that would temporarily protect the small-business status of companies that would be pushed out of small-business programs as a result of a size-standard change. She said a grandfather clause would help companies that built their business plans around the current standards.

At least one industry group was unhappy about SBA's delay. Lloyd Chapman, president of the Microcomputer Industry Suppliers Association in Petaluma, Calif., said his organization prompted 2,000 of the 4,500 comments to SBA.

Those 2,000 comments were form letters that supported a part of SBA's proposed rule that would have cut the non-manufacturer size standard from 500 to 100 employees.

"An overwhelming number of people were in favor of the change from 500 to 100. They were a representative sample of the American public," not just computer sellers, Chapman said.

Chapman's group represents small information technology suppliers. He said SBA's rule withdrawal shows that the agency is discounting his group's input.

Jackson disagreed.

"Multiple comments from an organization are a gauge of how strongly the members of the organization feel, but we also need to put that in context," he said. "You may have other organizations that represent a large membership that are taking a position most members support, but through one letter."

"The non-manufacturer size standard, in my opinion, needs to be reviewed and considered," Jackson said.

Chapman said he opposed most of SBA's proposal, other than the change to the non-manufacturer standard, but added: "They can do what they want to with all this other stuff. I don't care."

Resolving Problems Raised By Critics of Size-Standard Rules Won't Be Easy


Resolving Problems Raised By Critics of Size-Standard Rules Won't Be Easy

Minority Business Insider
July 16, 2004

Reaction is mostly positive to the Small Business Admin.'s decision to pull proposed regulations to change the size-standards system to one based primarily on employment from one based mainly on gross receipts. But the problems cited by commenters won't be easy to resolve.

Several commenters assert the current system isn't broken, and at least one says the rules for determining whether a small firm is affiliated with a large business and therefore ineligible for favorable treatment is the real problem.

About 2,300 of the more than 3,700 comments support a proposal to reduce to 100 from 500 the number of employees a non-manufacturing firm can have to still be considered small. Those commenters do not address the proposed switch to an employment-based system.

It is far from certain SBA's plan for another try with more public input before a rules change is proposed can achieve a more acceptable outcome. This is because there are fundamental conflicts in the objectives of different stakeholders.

On one hand, federal agencies are struggling to meet the statutory procurement goals for small business and various socioeconomic subcategories of ownership. If "small" is defined to include larger companies than current rules permit, it would be easier for the agencies to meet the goals.

The Defense Dept.'s threat to seek legislation changing to an employment-based method produced an interagency task force, eventually leading to the SBA proposal. DoD was finding many small businesses, if they received a DoD contract, would become large businesses in a revenue-based system.

Frank Ramos, director of DoD's OSDBU, praises SBA's effort and says he's confident the final product will meet his agency's needs. Ramos says he is making progress in solving the problem with teaming agreements between small companies to handle large contracts without exceeding the revenue limits.

To translate the revenue-based regime into an employment-based system without making small-business preferences available to obviously large concerns, the SBA size standard experts had to ensure small really was small within a given industry.

The proposed new system would have replaced the current one with 37 size levels, 30 of which are based on average annual receipts, with 10 employee-based categories.

In forecasting the impact of the new system, SBA used 1997 Census data and concluded 35,200 businesses would gain eligibility and 34,100 would lose it for a net gain of 1,100 businesses classified as small. SBA saw this as a positive net effect (MBI, 04-4p3).

But the Office of Advocacy does not.

An analysis provided without charge to OA by Eagle Eye Publishers Inc., a Fairfax, VA, specialist in federal procurement statistics, shows the changes would increase federal spending because firms now considered large would be defined as small. Eagle Eye says companies in the top 25 North American Industrial Classification System codes that set to become employment-based would enjoy a 5% increase in procurement dollars.

" The effect of this may be to crowd out existing small businesses," OA tells SBA in a letter requesting the rules be pulled.

OA says the Regulatory Flexibility Act requires SBA to further examine by industry the impact of the rule change on the 34,100 firms adversely affected by it. This analysis should extend to small nonprofit organizations and small government jurisdictions. Some nonprofits are eligible for micro loans and disaster loans.

One of the most controversial elements of the SBA proposal would have reduced to 100 from 500 the maximum number of employees a non-manufacturing company could have to be considered small.

Lloyd Chapman, the California information-technology executive who has led a campaign to expose large companies falsely claiming to be small, mounted an effort to get companies, chambers of commerce and small towns to write in favor of the change. The result was more than 2,300 comments in favor.

But the Coalition to Preserve Small Business says this would instantly strip small-business status from at least 774 small businesses and SBA did not analyze the impact of this.

Chapman, who has founded the American Small Business League to work for the reversal of government policies and practices, which have hurt small business (see p5), notes Census figures show 98% of the 5.7 million firms with employees had 100 or fewer employees in 2001.

SBA plans to publish an advance notice of proposed rulemaking requesting additional information on issues raised by the comments and it may schedule public hearings.

When SBA made a series of proposals in the early 1980s that led to the adoption of the current size-standard system in 1984, the agency received more than 3,000 comments (MBI, 04-04p3).

Crusader Against Size Fraud Forms SmallBiz Advocacy Group


Crusader Against Size Fraud Forms SmallBiz Advocacy Group

By Jim Byrne
Minorities in Business Insider
June 30, 2004

Lloyd Chapman, who has battled for a dozen years to expose large businesses illegally claiming to be small, founds a new organization to work for a reversal of federal government policies and practices he believes have hurt small businesses.

"I think the Small Business Admin. has worked hand-in-glove with other federal agencies to let large firms get contracts as small businesses because it makes it easier for the agencies to meet their small-business goals," charges Chapman.

He says a high priority for his new group will be organizing class action lawsuits on behalf of small businesses harmed by large businesses claiming to be small.

The American Small Business League will supplant the Microcomputer Industry Suppliers Assn. he founded in 2001. Financed largely with his money, MISA has no paid membership but worked with about 5,000 small IT companies to force investigations of whether large companies were falsely claiming to be small.

Among the results was a General Accounting Office investigation that found 28% of federal procurement dollars identified as going to small businesses in FY 2001 went to companies that also received contracts as large businesses. The report was given last year at a hearing by the House Small Business Committee (MBI, 5/14/o3p2).

Chapman's efforts also caused SBA to remove about 600 companies from PRONet because they were found to be other than large. PRONet, the SBA's small-business database, has since been integrated into the Defense Dept.'s Central Contractor Registration (MBI, 04-1p3).

Chapman says the fact SBA did not prosecute for fraud any of the 600 companies removed from PRONet or any of the 85 firms found to be other than small as the result of protests in Fiscal 2002 (MBI, 4/23/03p2) makes him very skeptical about the agency's commitment to the welfare of small businesses.

Chapman plans a fund-raising effort among small businesses to support the new group. He is no longer on salary at GCMicro, the Novato, CA, IT company of which he once was general manager.

Small-business advocate unfazed


Small-business advocate unfazed

Novato man's effort to tighten size limits delayed by officials

By Keri Brenner
Marin Independent Journal
May 18, 2004

Lloyd Chapman of Novato says he isn't upset that federal officials bumped today's deadline for public comment on proposed new small-business size standards back another 45 days.

"Apparently there was some pressure from Congress to do that," said Chapman, president of the Microcomputer Industry Suppliers Association, a trade group that advocates for small business rights.

"I'm still going to win."

Chapman, a consultant with North Bay software reseller GC Micro Corp., said the proposed new standards would affect U.S. Small Business Administration rules that set 500 employees as the maximum size for a business to qualify for federal small business contract money.

Chapman has lobbied for two years against the 500-employee standard, saying it opens the door for huge conglomerates to circumvent the rules and usurp money earmarked for bona fide small businesses. The proposed new rules would reduce the definition of a small business to a maximum of 100 employees.

He said he believes the public comment period extension was a reaction to the strong support for the rule change.

" I found out (the SBA) got 1,400 responses so far - and 1,000 were from my Web site," said Chapman, whose company moved last year from Novato to Petaluma. "Apparently the SBA didn't like the response (in favor of the size reduction), so they're going to try to manipulate it by giving the people who are opposed to it more time."

SBA spokesman Gary Jackson could not be reached for comment on the reason for the public comment period extension.

According to Chapman, the size standard change would redirect $30 billion to $50 billion annually in federal small business contracts away from large conglomerates and instead to actual small businesses. An investigation last summer by the U.S. General Accounting Office found some of the nation's largest corporations - including Verizon and Dole Food, for example - appeared on the SBA's database of eligible federal small business contractors.

U.S. Rep. Lynn Woolsey, D-Petaluma, who has supported Chapman's efforts, said she backed the size standards reduction.

"Small businesses are the backbone of the American economy," Woolseysaid. "By working to change the definition of a small business for government contracts from 500 to 100 employees, federal contracts specifically designed to ensure the success of American small business would go where they belong - to support Americans, not big companies dressed in sheep's clothing."

The public comment period extension comes coincidentally at the same time that President Bush proclaimed this week as "National Small Business Week."

In the proclamation, issued yesterday, Bush said small businesses "create approximately 70 percent of new private sector jobs in this country.

" As our nation's economy continues to grow stronger, we must encourage their spirit of enterprise," Bush said.

U.S. Sen. John F. Kerry, D-Mass., Bush's likely opponent in the November elections, has publicly supported Chapman's efforts to streamline the SBA's small business contracting guidelines.

Kerry, lead Democrat on the Senate's Small Business and Entrepreneurship Committee, said yesterday he supports the 45-day public comment period extension.

" The committee has already received a number of letters from the small business community about SBA's proposed rule," Kerry said. "Extending the comment period will give constituents more time to review and respond to the potential changes."