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It’s Official–NAICS Size Standard Calculation Moves to 5 Years

More companies will qualify as or stay a “small business” for federal contracting opportunities under a new U.S. Small Business Administration (SBA) rule that goes into effect on January 6, 2020.

The rule applies to all small businesses in any North American Classification System (NAICS) category that are subject to SBA’s revenue-based size standards. The time period for calculating average annual receipts lengthens from three years to five years after a transition period.

SBA expects the change will allow more companies to qualify as a small business for a more extended period of time. Potential perks for these small businesses include set-aside contracting, financial assistance, reduced fees, less paperwork, and fewer compliance requirements.

The calculation shift is mandated by the Small Business Runway Extension Act (Public Law 115-324), which gained bipartisan support and was signed into law in December 2018. The new SBA rule, which implements the law, does not apply to Business Loan and Disaster Loan Programs. The agency will address these in a separate rulemaking.

How the New Rule Will Roll Out

Until January 6, 2020, SBA will continue to apply three years when it calculates the average annual receipts for all industries subject to SBA’s and any other federal agency’s revenue-based size standards. That means the three-year period will apply to any initial offer that includes price and is submitted before January 6, 2020.

The rule includes a two-year transition period that runs from January 6, 2020, through January 6, 2022. During this time, a company and its affiliates may choose to use either a three-year average or a five-year average to calculate receipts.

After January 6, 2022, the five-year average is mandatory.

Time is a Blessing

Although the rule may have mixed consequences, SBA anticipates that, in most cases, the more extended calculation period will give companies more time to compete in small business set-aside procurements. For example:

  • Some mid-size businesses that have just exceeded their size standards could regain small business status.
  • Some advanced and larger small businesses about to exceed size standards could retain their status for a longer time.
  • However, some advanced small businesses with a five-year receipts average that is higher than their three-year average may lose their small business status sooner. These firms may choose to stay with a three-year average during the transition period.
  • Firms with an outlier year of significant revenue will have more time to determine whether that growth can be sustained. If revenue growth continues, companies will have more time to adjust to unrestricted competition in federal contracting.

For more details on SBA’s new revenue-based size rule, visit https://bit.ly/34Ce4oH.

Still confused how the rule will affect your federal marketplace position? Reach out to the govcon experts at CAVU for more insight on the new calculation, as well as how your accounting strategy can expand your business.

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