SBA attempts to close small-biz loophole

The Small Business Administration is preparing a rule intended to close a loophole under which large companies can bring in revenue under small-business contracts.

Companies that win contracts as small businesses can continue to earn money under them after they outgrow their small-business status, sometimes for years. Often, the size status is considered to be in effect for the duration of a contract, or re-evaluated only when the agency is considering exercising optional contract extensions, said Gary Jackson, assistant administrator for size standards at SBA.

Consequently, large companies often show up on lists of top-performing small businesses, raising eyebrows among small-business advocates.

The new rule, which will be final when published, is about to undergo Office of Management and Budget review. Jackson declined to say what the rule will require, but in April 2003, SBA published a proposed rule that would have required companies to recertify their size annually.

That drew about 600 comments, Jackson said. Some small-business advocates believe that such frequent recertification would force companies that are just barely outside the small-business definition to compete against much larger firms before they're ready. Others counter that allowing companies to call themselves small for years after they outgrow the designation gives those firms an unfair advantage over much smaller companies.

Jackson said the soon-to-be-published rule was developed in consultation with other agencies.

“When we develop policies, we don’t do that in a vacuum," he said. "We have to coordinate with other agencies. That’s part of the OMB review. It’s not just SBA imposing its will on everyone.”

The new rule will be binding governmentwide, he said, so individual agencies will not be able to put it aside for specific contracts. Jackson expects it to be published before the end of the year.

He said that companies should be prepared for the change.

“I expect it will be binding pretty immediately at the time of the rule," he said. "Otherwise, you have a big loophole right away.”

SBA is also evaluating comments on an Advanced Notice of Proposed Rulemaking it published in December 2004 as part of an effort to simplify the process used to determine whether a business qualifies as small. Earlier in 2004, the agency had proposed a much simpler method than the one currently used, but ultimately withdrew it after many companies objected that it would force them out of the small-business programs unfairly.

Jackson said it is unclear whether the agency will take another shot at changing the process. Any new effort, however, is unlikely to happen before 2006.