The Small Business Administration (SBA) announced December 5 that it is changing the measuring period for calculating average annual gross receipts (revenue) of small businesses to determine small business size from three years to five years.

The SBA uses Size Standards to determine whether a business qualifies as “small” for procurements set aside by the federal government for small businesses.  For example, procurements set aside for contractors with NAICS Code 236220 (“Commercial and Institutional Building Construction”) has a $39.5 million Size Standard. Therefore, businesses with annual revenue below $39.5 million qualify as small for that particular procurement. Small business size for procurements is generally measured based on the annual revenue of the business (or in some circumstances, based on the business’ number of employees).

Size standards based on annual revenue are currently calculated based on an entity’s average annual revenue over the past three tax years (along with the average annual revenue of the business’ affiliates over the same period). 13 C.F.R. § 121.104 (“The average annual receipts size of a business concern with affiliates is calculated by adding the average annual receipts of the business concern with the average annual receipts of each affiliate”). This calculation of annual revenue provides flexibility for entities to maintain their small business status for a procurement even though their revenue for one or more of the past three years may have actually exceeded a procurement’s designated Size Standard. As long as an entity’s three-year average annual revenue falls below the applicable Size Standard ($39.5 million in the example above) the entity is considered small.

On December 5, 2019, the SBA announced that it was modifying its rule to calculate average annual revenue to increase the measuring period from three years to five years. For most small businesses, this change is good news as it will enable the business to remain small for a longer period of time assuming the business’ revenue increases incrementally each year. This five-year change will become effective for procurements issued on or after January 6, 2020.

For detailed coverage of multiple issues related to SBA small business concepts and procedures, consult my free  “Federal Contractors’Guide to Small Business Administration Set-Aside Contracts, Size Standards, Size Protests, and Affiliation” eBook, which can be accessed here.

Doug Hibshman is a partner in Fox Rothschild LLP’s Federal Government Contracts & Procurement; Construction; Litigation; Privacy & Data Security; Mergers & Acquisitions; White-Collar Compliance & Defense; Health Law; and Architecture, Engineering & Design Professional Firms practice groups. He routinely assists clients with understanding and applying the Small Business Administration (SBA) regulations, filing and defending against SBA size protests, mitigating possible affiliation issues, and ensuring compliance with SBA regulations. 

Mary Mikhaeel, a law clerk at Fox Rothschild, contributed to this post.