SBA Inflationary Increase: Size Standards, Economic Disadvantage, and 8(a) Sole Source Thresholds
With Dave Yang
On November 17, 2022, the Small Business Administration (“SBA”) issued a final rule and several interim final rules effective December 19, 2022 that upwardly adjust some of SBA’s monetary thresholds for inflation. The changes are welcome news in this period of economic uncertainty because they will ultimately help more small businesses participate in federal set-aside opportunities. As summarized below, SBA’s new rules cover three inflationary adjustments: (1) receipts-based size standards; (2) economic disadvantage thresholds; and (3) the 8(a) sole source dollar limitation.
First, and by way of background, for services-based North American Industry Classification System (“NAICS”) codes, a contractor’s size status is generally calculated by averaging their receipts for the previous five fiscal years. Where the average falls below the dollar threshold established by SBA for the corresponding NAICS code assigned to a set-aside solicitation, the company is small and therefore eligible for award. Where the five-year average is above the size standard, the company is “other-than-small” and thus ineligible for a small business award.
Regarding SBA’s size standards, while the final rule leaves unchanged SBA’s 2019 inflationary adjustments, it also adds an additional adjustment of 13.65 percent for the significant inflationary impacts that industry has experienced since 2019. This adjustment is notable because it is occurring before the standard five-year review for NAICS code adjustments, including those due to inflation. As applied, all current receipts-based size standards will be multiplied by 1.1365 and rounded to the nearest $500,000 (except for agricultural industries, where the adjusted amounts will be rounded to the nearest $250,000). For example, the 541330 NAICS code (Engineering Services) will be adjusted by multiplying the current $22.5 million standard by 1.1365 to arrive at $25.57 million, which would then be rounded to $25.5 million. The size standard increases are significant as they may extend the time that contractors have in which to remain a small business and compete for set-aside contracts.
Second, SBA’s interim final rule upwardly adjusts the economic disadvantage thresholds for both the 8(a) Business Development and the Economically Disadvantaged Women-Owned Small Business (“EDWOSB”) programs. For the 8(a) and EDWOSB programs, SBA’s interim final rule includes an 11.86 percent inflationary adjustment to the economic disadvantage thresholds. Thus, the new net worth limit will be $850,000 (up from $750,000), the new aggregate gross income limit will be $400,000 (up from $350,000), and the new total asset limit will be $6.5 million (up from $6 million). These new economic disadvantage thresholds will enable greater participation in SBA’s programs and related set-aside opportunities.
Last, but not least, currently, 8(a) participants (other than concerns owned by an Indian Tribe, Alaska Native Corporation, Native Hawaiian Organization, or Certified Development Company) may not receive an 8(a) sole source award where their total lifetime aggregate of competitive and sole source 8(a) awards eclipses $100 million. SBA’s rule substantially expands this limit by applying a massive 68.33 percent adjustment for inflation, after acknowledging that no such adjustments have been made since the inception of the program. Thus, those same 8(a) participants will now be eligible to receive 8(a) sole source contracts so long as their total lifetime aggregate of competitive and sole source 8(a) awards does not surpass $168.5 million. This nearly three-quarters increase will afford many 8(a) companies additional runway to receive sole source awards as an 8(a) participant.
Takeaway
As the forgoing demonstrates, SBA’s inflationary adjustments are welcome news for small business because they offer much needed relief in these largely unprecedented times. With SBA’s changes, countless small businesses will be able to retain their size status, and enjoy the competitive benefits associated with that status, for a potentially much longer time than they might otherwise could absent these inflationary adjustments. SBA’s revised economic disadvantaged threshold makes it easier to qualify for SBA’s programs and the 8(a) sole source threshold also will enable some 8(a) participants to regain eligibility for sole source 8(a) awards.
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