Reed Smith Client Alerts

On June 6, 2022, the U.S. Small Business Administration (SBA) published a final rule (87 FR 34094) (Final Rule) that announced a new method for calculating small business employee-based size standards. As a result of the Final Rule, effective July 6, 2022, the SBA will increase the current 12-month average to a 24-month average to calculate an entity’s number of employees for the purpose of determining eligibility to participate in all SBA programs. Additionally, the SBA will permit entities participating in its Business Loan, Disaster Loan, Surety Bond, and Small Business Investment Company (SBIC) Programs to use a five-year averaging period as an option in addition to the existing three-year averaging period for the purpose of calculating average annual receipts. This change may allow certain small businesses to remain as small businesses for longer and permit certain mid-sized businesses that have outgrown their size status to regain their small business status.

The SBA has issued a Final Rule that materially expands the existing methodology businesses use to qualify as a small business in various situations. The Final Rule follows a proposed rule (68 FR 60396) the SBA issued for comment last November. In particular, the Final Rule addresses two significant changes to how the SBA will calculate business size for the purpose of qualifying for SBA assistance programs under an employee-based size standard. Section 863 of the 2021 National Defense Authorization Act required the first change, which, of note, amended part of the Small Business Act, 15 U.S.C. 632(a)(2)(C)(ii)(I), to increase the lookback period for SBA's employee-based size standards from 12 months to 24 months for manufacturing entities. Based on this change, the size of a business concern under an employee-based size standard will be calculated by averaging the entity’s number of employees employed on a full-time, part-time, or other basis for each pay period in the preceding completed 24 calendar months. The Final Rule implements this change and extends this lookback period to both manufacturing and non-manufacturing entities.

The Final Rule is limited to employee-based size standards for government contractors that compete for government contracts under a small business status using an employee-based size standard. Under the current regulations, the SBA’s calculation of size standards based on receipts is based on a five-year averaging period, which recently changed from a flexible three-year or five-year period as of January 6, 2022. Thus, to the extent a government contractor uses a receipts-based size standard methodology for small business eligibility on its government contracts, the Final Rule does not change the current five-year average calculation methodology and, therefore, will not affect their size status.