Vendors cheer as SBA scraps proposed rule

Industry groups are pleased that the Small Business Administration has withdrawn proposed rules that would have changed the way small businesses are defined, and they are offering the agency alternative ideas.

SBA officials withdrew the rule after receiving 3,700 comments on it, said spokesman Seth Becker. Most of the comments supported the agency's effort to simplify the determination of what counts as a small business, but vendors expressed strong reservations about specific elements of the proposed rule, he said.

SBA has 37 definitions of small, based on a company's industry. The proposed

revisions, published in the Federal Register in March, would have reduced that to 10. It also would have defined most small businesses by their number of employees rather than by their revenue. Some designations are based on employees, others on annual receipts and some on a combination of factors.

When SBA officials published the rule, "the comments really came pouring in," Becker said. "The volume was significant enough that we extended the [comment period] from 60 to 105 days."

The criticisms centered on several issues, Becker said. "There were some questions about unintended consequences" pertaining to several aspects, he said.

Some critics wondered if basing the determination solely on size would affect companies' hiring practices. They were concerned that if a business was reclassified from small to large, it might cause the company's leaders to hold off on hiring more people, Becker said.

Other comments raised the issues of how to count part-time employees, contractors and employees within joint ventures, he said. The proposed rule addressed some of those questions already.

Critics worried that the new rule would force many small businesses out of that classification immediately, with no time to make an orderly transition, Becker said.

One of those critics was the Information Technology Association of America. Valerie Perlowitz, chairwoman of ITAA's Small Business Subcommittee, said that small businesses enjoy some special consideration because of their size and should not have to make a jarring, immediate shift.

"There needs to be a grandfather clause," said Perlowitz, who is president and chief executive officer of Reliable Integration Services Inc. Under the proposed rule, 34,000 small businesses would have lost that status, she said.

That would be "34,000 businesses who were working on three-year or five-year plans are now sent up the river," she said. "Without a paddle."

Alan Chvotkin, senior vice president and counsel at the Professional Services Council, said the rule as it had been written

did not answer many questions regarding transitions.

"If the rule went into effect on Jan. 1, then on Jan. 2 you had to adapt to a new size standard for new procurements," he said. "Maybe [also] for pending procurements. Maybe for [General Services Administration] schedule purchases. Maybe for new task orders under existing contracts. That was not addressed."

Chvotkin advocates multiple small-business standards that would apply to different activities. Small would be defined one way for the purpose of winning federal contracts, another way for determining eligibility for loan programs and yet another way for providing management assistance, for example.

Chris Jahn, president of the Contract Services Association of America, said the proposed rule would have required small businesses to track their number of employees week by week, a tremendous burden for a small firm.

SBA officials will start over by trying to determine what small businesses need, Becker said.

"We want to go out and really talk to small-business owners," he said. "What we are looking at doing is having a series of hearings or meetings around the country, in which we are going to sit down with small-business owners."

Becker emphasized that the agency is not throwing out the old proposal, just taking it off the table for a while. When a new version is published — although no deadline has been set yet — some parts of the recent rule may be back, he said.

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Trashed by popular demand

Small Business Administration officials had proposed to define small businesses based, in most cases, on the number of employees a company has and the industry it is in. Some of the categories in the now-withdrawn proposal include:

Computer storage device manufacturing firms: 1,000 employees.

Internet publishing and broadcasting companies: 500 employees.

Internet service providers: 150 employees.

Data processing, hosting and related services: 150 employees and $30 million in annual revenue.

Custom computer programming companies: 150 employees and $30 million in annual revenue.

Source: Small Business Administration