How small is small?

The Small Business Administration is working on changes to the system that determines if businesses are small.

Currently, some types of businesses are evaluated based on the number of employees, while others are judged by their average annual revenue.

Gary Jackson, SBA's assistant administrator for size standards, said he is trying to simplify the determination. "No final decision has been made, but what we are moving toward is a system where all size standards would be based on number of employees," he said.

The existing system is widely considered to be unwieldy. Many diverse businesses are small businesses on some contracts but not on others. The new system won't completely solve that complication but is intended to make it simpler for companies and agencies to figure out if they qualify as a small business, Jackson said.

"Right now, we have 37 different size standards," Jackson said. "We would like to cut that down considerably."

The new system is almost ready for consideration by SBA officials, he said. Once the agency approves the plan, Office of Management and Budget officials will evaluate it. Then a proposed rule will appear in the Federal Register and the 60-day comment period will be open to the public. Jackson said he expects the rule to be published by the end of the year.

The Defense Department and other agencies have asked SBA to make the changes, he said. Federal contracting guidelines urge agencies and prime contractors to steer a certain amount of work to small businesses — the governmentwide goal is 23 percent. Agency officials have told SBA that it is often hard for them to identify appropriate businesses.

"Size standards have been criticized for quite a long time for being complicated and confusing," Jackson said. "We started looking at ways to simplify the standards. Fortunately, we had leadership inside SBA and outside SBA who were interested."

Businesses will still be evaluated based on their North American Industry Classification System code, he said.

Jackson said he is trying to make the transition to the new system as painless as possible. The head-count thresholds for businesses that already use employee numbers won't change. Jackson is trying to choose employee size standards that correspond to revenue numbers for companies that will have to switch measures.

Although some companies will move into or out of the small-business qualification as a result of the change, Jackson does not plan to instigate grace periods. "There wouldn't be any grandfather clause," he said. "Like any change, we would want comment on the impact" before the rule is enacted.

Without having specific rules to look at, the impact of the change is difficult to predict, said Shiv Krishnan, president and chief executive officer of Indus Corp. Service companies are most likely to lose small-business status because their businesses are more labor intensive, he said.

"I think it will be very good," Krishnan said. "Right now, there are a lot of size standards. Over the last 15 years when I've been dealing with small business issues, even the contractors don't know sometimes that there are different categories. This is a welcome change."

The rules should be clear about how employees should be counted, he said. "That can be a tricky thing in our business because there are part-time employees, there are contract employees, there are employees who come in and out on projects."

Indus, an information technology services firm, has recently outgrown the $21 million threshold for IT services but is still within the $25 million limit for Internet publishing, Krishnan said.

Some companies that have outgrown the dollar threshold could return to small-business status with the change, Krishnan said, but probably not for long. "We may get one more year during which we may be able to bid on certain types of contracts, but if you continue to grow, you'll grow out of those things," he said.

Larry Allen, executive vice president of the Coalition for Government Procurement, said the change is needed to modernize the SBA system.

"This is a system that hasn't been updated in quite some time," he said. "As the commercial marketplace has changed substantially, the SBA's system hasn't kept up. As a result, you've got a government-measuring system trying to measure something that doesn't exist in the same environment anymore."