Aronie: Defining small by committee

I will admit to being a skeptic when it comes to stories about government officials seeking to simplify their procurement regulations. It's not that I don't trust the government, it's just that I know that the definition of a camel is a horse designed by a committee. And I understand that the government's streamlining efforts usually are committee-driven.

It was against this background that I recently read the Small Business Administration's newly proposed size-standard regulations.

Currently, federal contractors trying to determine if they qualify as small businesses must sort through 37 size standards covering more than 1,100 industries, from berry farming — excluding strawberry farming, which apparently views itself as above the farming of other, lesser berries — to tortilla manufacturing to electronic computer manufacturing.

To make matters worse, not only does the benchmark for small differ from industry to industry, the yardstick used to identify that benchmark differs as well. In some industries, business size is tied to the number of employees, while in others it is tied to annual revenue.

These crisscrossing regulations often produce unintended consequences. Many businesses, for example, are small when they sell one product, but large when they sell another. This is particularly problematic when a single set of federal contracts, such as the General Services Administration's schedule contracts, encompasses products that cross multiple industries.

In an effort to combat such confusion, SBA officials are proposing to do away with many size standards tied to revenue and instead rely on size standards tied only to employee numbers. They also propose reducing the number of size standards from 37 to 10. The resulting 10 standards will range from 50 employees to 1,500 employees.

Unquestionably, this is a positive development, but the question of business size will never be easy to answer. For example, the move from revenue to business size standards covers most industries but not all of them. Even under the new rules, some businesses still will be subject to a receipts cap in addition to the employee-based size standards.

Furthermore, vendors should be aware that, when calculating number of employees, they must count "any person on the payroll...regardless of hours worked or temporary status," including employees of affiliated entities, the proposed rule states. Unless they are deemed to be affiliated with the vendor, subcontractors are not counted as employees.

The proposed regulations affect prime contractors and subcontractors. So, small-business subcontractors must take care to assess the effect of the proposed rules on the size certifications that they have made to prime contractors who maintain federal subcontracting plans.

In the end, SBA's proposed rule represents a worthwhile step in reducing the complexity and consequent risk inherent in government contracting. The government awards more than one-quarter of its prime contracts to small businesses, so this revision is long overdue. Industry should be watchful to ensure that, following the receipt of comments, the final rule doesn't devolve from a horse into a camel.

Aronie is a partner in the government contracts group of Sheppard, Mullin, Richter & Hampton LLP in Washington, D.C. He can be reached at jaronie@sheppard mullin.com or (202) 218-0039.