A Small Business Administration's bid to modernize its classifications ofcompanies eligible for contracts and loans has drawn venom from a powerfulHouse committee chairman and some in the information technology industry.

A proposed rule to revise employee-based size standards is "arbitraryand capricious" and "irrational," Rep. Sam Graves, R-Mo., chairman of the SmallBusiness Committee, said in a Nov.10 letter to SBA. The draftrule also "disregarded the express language" of the 2013 National DefenseAuthorization Act requiring SBA to publicly document its reasoning for changingclassifications, added Graves, who warned of litigation and a legislative fix.

Critics worry that too many IT companies wouldbe dealt out of SBA's programs.

In September, the SBA published in the Federal Register aproposal to change national industry classifications, as part of itsfour-year-old review of size standards under the 2010 Small Business Jobs Act.The proposed process would base classification of companies more on annualrevenues more than number of employees. The comment period ended Monday.

Together with other changes, the new rule would define as small businessesthose IT firms with $27.5 million or less in annual sales, making nearly 1,650more firms eligible for federal procurement and SBA's loan programs, accordingto the agency.

Among other changes, the proposal would no longer allow some computerservices firms with 150 employees or fewer to qualify for a separatesub-category for Information Technology Value Added Resellers.

"For size standards review, SBA takes into account the structuralcharacteristics of individual industries, including average firm size, startupcost and entry barriers, the degree of competition, and small business share offederal government contracting dollars," SBA said in the proposed rule. "Thisensures that small business size definitions reflect current economicconditions and federal marketplace in those industries."

The Petaluma, Calif.-based American Small Business League has longcriticized SBA's methods, saying they allow large companies to masqueradeas small businesses to win contracts.

"If the new SBA policy were adopted, small businesses that provide a widerange of information technology products would lose their small businessstatus and be forced out of the federal marketplace," said league founder LloydChapman. "At the same time thousands of small businesses in the IT industrywill be reclassified as large businesses, the SBA will continueto report billions of dollars in awards to Fortune 500 firms andtheir subsidiaries as small business contracts."

The league estimates 12,000 companies would adversely affected by theproposed rule, and it plans to file an injunction.

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