Small Business Size Standards; Engineering Services, Architectural Services, and Surveying and Mapping Services

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

Small Business Size Standards; Engineering Services,

Architectural Services, and Surveying and Mapping Services

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The Small Business Administration (SBA) is proposing a size

standard of $7.5 million in average annual receipts for general

Engineering Services (part of Standard Industrial Classification (SIC)

code 8711), $5.0 million for Architectural Services (SIC code 8712) and

$3.5 million for Surveying and Mapping Services (SIC code 8713 and part

of SIC code 7389). The current size standard for each of these

industries is $2.5 million. The proposed revisions are being made to

better define the size of business in those industries that the SBA

believes should be eligible for Federal small business assistance

programs.

DATES: Comments must be submitted on or before April 6, 1998.

ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator

for Size Standards, 409 3rd Street, S.W., Mail Code 6880, Washington

D.C. 20416.

FOR FURTHER INFORMATION CONTACT: Robert N. Ray, Office of Size

Standards, (202) 205-6618.

SUPPLEMENTARY INFORMATION: The SBA is proposing a revision to the size

standard for general Engineering Services (part of SIC code 8711) from

$2.5 million to $7.5 million. The other size standards applicable to

Engineering Services under SIC code 8711--Military and Aerospace

Equipment, Military Weapons, Marine Engineering, and Naval

Architecture--are not being reviewed as part of this proposed rule. The

rule also proposes a revision to the size standard for the

Architectural Services industry (SIC code 8712) from $2.5 million to $5

million and a revision to the size standard for the Surveying and

Mapping Services industry (SIC code 8713 and part of SIC code 7389)

from $2.5 million to $3.5 million.

From September 30, 1988 until September 30, 1996, the SBA was

prohibited by statute from changing the size standards for general

engineering services, architectural services, and surveying and mapping

services. These industries are subject to the special procurement

procedures of the Small Business Competitiveness Program (Title VII of

Pub. L. 100-656, 102 Stat. 3853, 3889). This Program specifies special

procedures on the use of small business set-aside contracting for the

procurement of services within the four designated industry groups. The

designated groups are: Construction (SIC codes 1521-1542, SIC codes

1611-1629, and SIC codes 1711-1799); Engineering, Architectural, and

Surveying and Mapping Services (SIC codes 8711, 8712, 8713, and part of

SIC code 7389); Refuse Systems and Related Services (SIC code 4953 and

part of SIC code 4212); and Non-nuclear Ship Repair (part of SIC code

3731). Over the period of 1988 to 1996, the Program included a

provision that prohibited any change to the size standards for the

designated industry groups. However, the Small Business Programs

Improvement Act of 1996 included an amendment to the Program that

repealed the prohibition placed upon the SBA from revising these

industries' size standards (see Omnibus Consolidated Appropriations Act

for Fiscal Year 1997, Division D, Title I, Section 108, Pub. L. 104-

208). In the accompanying legislative history, the Congress indicated

that the SBA should take appropriate action to adjust the size

standards for the designated industry groups, although no specific

guidance was provided on how these size standards should be adjusted by

the SBA. At this time, the SBA is proposing increases to the size

standards for the general engineering services, architectural services,

and the surveying and mapping services industries based on its review

of economic and Federal procurement data for these industries. The size

standards for the remaining designated industry groups are currently

being reviewed by the SBA. A decision will be made in the near future

if revisions to any of these industry size standards should be

proposed. If so, a proposed rule will be published in the Federal

Register.

Below is a discussion of the SBA's size standards methodology and

the analyses leading to the proposed size standards. This is followed

by a discussion of alternative size standards and the estimated

economic impact that the proposed size standards, if adopted, would

have on Federal Government contracting and the SBA's financial

assistance programs.

Size Standards Methodology

In considering the appropriateness of a size standard, the SBA

evaluates the structural characteristics of an industry and the

participation of small business in SBA programs. There are four factors

describing the structural characteristics of an industry: average firm

size; distribution of firms by size; start-up costs; and industry

competition. While these four factors are generally considered the most

important indicators of industry structure, the SBA will consider and

evaluate all relevant information that would assist it in assessing an

industry's size standard. Below is a brief description of the four

industry structure factors.

1. Average firm size is simply total industry revenues (or number

of employees) divided by the total number of firms. The SBA tends to

set higher size standards for industries with an average firm size

significantly higher than the average firm size of a group of related

industries. SBA tends to set lower size standards in industries with a

lower average firm size relative to a related group of industries.

2. The distribution of firms by size examines the proportion of

industry sales, employment, or other economic activity accounted for by

firms of different sizes within an industry. If the preponderance of an

industry's output is by smaller firms, this would tend to support a low

size standard. The opposite would be the case for an industry in which

the distribution of

[[Page 5481]]

firms by size indicates that output is concentrated among the largest

firms in an industry.

3. Start-up costs affect a firm's initial size because entrants

into an industry must have sufficient capital to start a viable

business. To the extent that firms in an industry have greater start-up

capital requirements than firms in other industries, the SBA would be

justified in considering a higher size standard. As a proxy measure for

start-up costs, the industry's ratio between total payroll costs to

sales is examined. An industry with a relatively low proportion of

payroll cost to total sales as compared with the average proportion of

other industries would tend to indicate that it is a capital intensive

industry. For those types of industries, that circumstance suggests a

relatively higher size standard.

4. As an indicator of industry competition, the SBA assesses

competition within an industry as measured by the proportion or share

of industry sales garnered by producers above a relatively large firm

size. For purposes of the analysis in this proposed rule, the

proportion of industry sales generated by the four largest firms in an

industry is examined--generally referred to as the ``four-firm

concentration ratio.'' To the extent that a significant proportion of

economic activity within an industry is concentrated among a few

relatively large producers, SBA tends to set higher size standards to

assist firms in a broader size range to compete with firms that are

dominant in the industry.

SBA has established ``anchor'' size standards of 500 employees for

the manufacturing and mining industries and $5 million for

nonmanufacturing industries. To the extent that the structural

characteristics of an industry are significantly different from the

average characteristics of industries with the anchor size standard, a

size standard higher or lower than the anchor size standard may be

supportable. For the industries under review in this proposed rule, the

characteristics of the four industry factors for each industry were

compared to the average characteristics of the nonmanufacturing

industries with the anchor size standard of $5 million (hereafter

referred to as the nonmanufacturing anchor group). If the

characteristics of an industry are similar to characteristics of the

nonmanufacturing anchor group, then the anchor size standard of $5

million is recommended. If, however, the industry characteristics are

significantly different than the average characteristics of the

nonmanufacturing anchor group, then a size standard above or below $5

million would be appropriate.

As indicated above, the impact of a proposed size standard on SBA's

programs is evaluated in addition to industry structure to determine if

small businesses defined under the existing size standard are receiving

a reasonable level of assistance. This assessment usually involves the

calculation of the proportion or share of Federal contracts awarded to

small businesses. In general, the lower the share of Federal contract

dollars awarded to small businesses in an industry which receives

significant Federal procurement revenues, the greater would be the

justification for a size standard higher than the existing size

standard. In SBA's financial assistance programs, the volume of

guaranteed loans within an industry and the size of firms obtaining

loans are examined to assess whether the current size standard may be

inappropriately restricting the level of financial assistance to firms

in that industry.

Evaluation of Industry Size Standards

SBA analyzed the size standards for the, engineering, architectural

and surveying and mapping services industries by comparing their

industry characteristics with the average characteristics of the

nonmanufacturing anchor group discussed above. The table below shows

the characteristics for each industry and the average characteristics

for the nonmanufacturing anchor group. A review of these factors leads

to a recommended size standard for each industry.

Industry Characteristics of the Nonmanufacturing Anchor Group and the Engineering, Architecture and Surveying Services Industries

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Industry sales by size of firm 4-firm

Average firm ------------------------------------------------ Payroll to concentration Share of gov't

Category size sales ratio procurement

(millions) $5M (percent) $10M (percent) $25M (percent) (percent) (percent) (percent)

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Nonmanufacturing Anchor Group........... $0.85 51.0 61.0 67.0 27.0 15.0 N/A

Engineering Services.................... 1.83 25.9 32.7 40.8 41.8 10.9 17.7

Architectural Services.................. 0.65 64.7 74.7 84.4 39.3 5.4 25.5

Surveying Services...................... 0.28 88.5 90.7 93.6 39.2 3.5 25.8

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General Engineering Services (Part of SIC Code 8711)

SBA proposes a size standard of $7.5 million for the general

engineering services industry based on a review of the industry

characteristics shown above, and based on the share of Federal

procurements obtained by small business. The average firm size of

engineering firms is over twice the average firm size of the

nonmanufacturing anchor group, and supports a size standard moderately

above the $5 million anchor size standard. The distribution of sales by

firm size also supports a size standard significantly above the anchor

size standard. Under this factor, the amount of sales obtained by

engineering firms of $5 million and less in sales, $10 million and less

in sales, and $25 million and less in sales, is significantly less than

found for the anchor nonmanufacturing group. The industry factor of

payroll to sales shows this industry to be more labor intensive than

the nonmanufacturing anchor group. This factor indicates that start-up

costs are relatively low and would support a size standard of not more

than $5.0 million. The four-firm concentration ratio shows that

engineering services is a highly competitive industry where the largest

firms in the industry account for a low share of industry sales. This

factor also supports a size standard at or below $5 million. However,

the percent of Federal contract dollars awarded to small engineering

firms during fiscal years 1995 and 1996 is a relatively small share of

Federal contracting to small firms and supports a size standard much

higher than the current $2.5 million level. Considering these factors

in the aggregate, SBA believes that a size standard moderately higher

than the anchor size standard is appropriate for engineering services.

Accordingly, the

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SBA proposes a size standard of $7.5 million for this industry. This

size standard is above the standard that would have been established in

1994 for this industry if the SBA had had the authority to change it

then based upon inflation since the time of the previous adjustment in

1984.

Architectural Services (SIC Code 8712)

A size standard of $5 million is being proposed for the

architectural services industry. The average firm size of an

architectural firm is similar to those of the average firm size of

industries in the nonmanufacturing anchor group, and supports a size

standard of $5 million. For the industry factor which looks at the

distribution of firms, firms at the three specified size classes for

architectural services obtained a moderately higher proportion of sales

than similar sized firms within the nonmanufacturing anchor group. This

factor supports a size standard at or slightly below $5 million. The

industry factor of payroll to sales reveals that the architectural

services industry is more labor intensive than the nonmanufacturing

anchor group. This factor indicates that start-up costs are relatively

low and would support a size standard of not more than $5.0 million.

The four-firm concentration ratio is below the ratio for the

nonmanufacturing anchor group, and supports a size standard at or below

$5 million. A size standard higher than the current $2.5 million size

standard is supportable in light of the relatively low share of Federal

procurement dollars awarded to small architectural firms during fiscal

years 1995-96. At the current size standard, small businesses account

for 52 percent of industry sales but received only 25.5 percent of

Federal contracting dollars. The SBA believes that since the industry

characteristics are at or slightly below the characteristics of the

nonmanufacturing anchor group, and since a wide disparity exists

between industry sales to small business and the share of Federal

contract awards, the $5 million anchor size standard is appropriate for

this industry. This size standard is above the standard that would have

been established in 1994 for this industry if the SBA had had the

authority to change it then based upon inflation since the time of the

previous adjustment in 1984.

Surveying Services (SIC Code 8713)

A size standard of $3.5 million is being proposed for the surveying

services industry. The average firm size of a surveying firm is

significantly below the average firm size of industries in the

nonmanufacturing anchor group, and supports a size standard of less

than $5 million. For the industry factor which looks at the

distribution of firms, firms at the three specified size classes for

surveying services obtained a significantly higher proportion of sales

than similar sized firms within the nonmanufacturing anchor group. This

factor also supports a size standard below $5 million. The industry

factor of payroll to sales reveals that the surveying services industry

is more labor intensive than the nonmanufacturing anchor group. This

factor indicates that start-up costs are relatively low and would

support a size standard of not more than $5.0 million. The four-firm

concentration ratio is below the ratio for the nonmanufacturing anchor

group, and supports a size standard at or below $5 million. Similar to

architectural services, there exists a wide disparity between the value

of Federal contracts awarded to small surveying firms and industry

sales produced by these firms. Small surveying firms account for

approximately 80 percent of total industry sales but received only 26.8

percent of Federal contracting dollars spent for surveying. The SBA

believes that due to the discrepancy between the small business share

of total industry sales and Federal Government contracts, an increase

to the current size standard is warranted, but one which is less than

the nonmanufacturing anchor size standard. Based on these

considerations, the SBA is proposing a size standard of $3.5 million.

This size standard is consistent with the standard that would have been

established in 1994 for this industry if the SBA had had the authority

to change it then based upon inflation since the time of the previous

adjustment in 1984.

Mapping Services (Part of SIC Code 7389)

The size standard of $3.5 million is being retained for mapping

services included within SIC code 7389, Business Services, Not

Elsewhere Classified. Surveying and mapping are closely related

activities, and the SBA believes that mapping services should have the

same size standard as proposed in this rule for surveying services. In

its revision to the definition of industries as published in April of

1997, the Office of Management and Budget recognized the closely

related nature of these two services by creating a new industry under

the North American Industry Classification System titled ``Surveying

and Mapping'' (see 62 FR 17288, April 9, 1997). This industry is

constructed by combining the mapping services activities within SIC

code 7389 with all of the surveying services activities within SIC code

8713. In addition, the SBA has found that Federal contracts for mapping

services have been classified under both SIC codes 7389 and 8713.

Between 1995 and 1996, 61 percent of mapping services contracts were

classified under SIC code 7389 and 39 percent were classified under SIC

code 8713. Since surveying and mapping services are closely related,

the SBA is proposing a common size standard for these two services.

Dominant in Field of Operation

Section 3(a) of the Small Business Act defines a small concern as

one that is independently owned and operated, not dominant in its field

of operation, and meets detailed definitions or standards established

by the Administrator of the SBA. In lieu of a separate small business

eligibility criterion, the SBA includes as part of its evaluation of a

size standard whether a concern at or below a recommended size standard

would be considered dominant in its field of operation. This assessment

generally takes into consideration the market share of firms at a

recommended size standard or other factors that may reveal if a firm

can exercise a major controlling influence on a national basis in which

significant numbers of business concerns are engaged.

The SBA has determined that at the recommended size standards of

$7.5 million for general engineering services, $5 million for

architectural services, and $3.5 million for surveying and mapping

industries, no firm at or below those levels would be of a sufficient

size to be dominant in its field of operation. Firms at the proposed

size standards generate less than 0.25 percent of total industry sales.

This level of market share effectively precludes any ability by a firm

to exert a controlling effect on the industry.

Alternative Size Standards

The SBA considered two alternative size standards for these

industries. The first alternative considered was retaining a common

size standard for all three industries. The general engineering,

architectural, and surveying services industries fall under a three-

digit industry group, and presently have a common size standard of $2.5

million. The $5 million anchor size standard would be an appropriate

standard if a common size standard were believed to be more suitable

for these three industries. When combined together, the industry

characteristics are similar to the average characteristics of the

nonmanufacturing anchor group. As

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presented in the industry evaluations, significant differences exist

between the structure of the engineering industry, the architectural,

and the surveying and mapping industries. The SBA believes that these

differences are of significant magnitudes to warrant different size

standards among the three industries.

The second alternative considered was adjusting these size

standards only for inflation similar to the adjustment applied to most

receipts-based size standards in 1994 (61 FR 3280). Under this

alternative, the $2.5 million size standard would be increased to $3.5

million. The SBA believes, however, that these industries should be

thoroughly reviewed to determine the most appropriate size standard

rather than applying a simple inflation adjustment. Moreover, the SBA

believes that the unique history of these size standards and the

special attention they have received under the Small Business

Competitiveness Program compel a closer level of scrutiny for these

industry size standards than for most other industries.

The SBA welcomes public comments on the proposed size standards for

the general engineering, architectural, surveying and mapping services

industries. Comments on any of the alternatives to the proposal,

including those discussed above, should present the reasons why it is

preferable to the proposed size standards.

Compliance With Executive Orders 12612, 12788, and 12866, the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and the Paperwork

Reduction Act (44 U.S.C. Chapter 301 et seq.)

The SBA certifies that this rule, if adopted, would be a

significant rule within the meaning of Executive Order 12866.

Immediately below, the SBA has set forth an initial regulatory impact

analysis of this proposed rule.

(1) Description of Entities to Which the Rule Applies

SBA estimates that 2,215 additional firms would be considered small

as a result of this rule, if adopted. These firms would be eligible to

seek available SBA assistance provided they meet other program

requirements. Many of these firms probably had small business status in

1986 when these size standards were established at $2.5 million, but

have since lost eligibility because of general price increases. Of the

2,215 additional firms gaining eligibility, 1,747 operate in

engineering services, 428 operate in architectural services while 40

operate in surveying services. Firms becoming eligible for SBA

assistance as a result of this rule cumulatively generate $8.5 billion

in annual sales, while total sales in these industries are $77.5

billion. Of the $8.5 billion for newly eligible firms, $6.9 billion are

in engineering services, $1.4 billion are in architectural services and

$50 million are in surveying services.

(2) Description of Potential Benefits of the Rule

The most significant areas of benefits to businesses which could

obtain small business status as a result of adoption of this rule is

eligible for the Federal Government's procurement programs and the

SBA's Business Loan Program. The SBA estimates that firms gaining small

business status could potentially obtain Federal contracts worth $167

million per year under the Small Business Set-aside Program, the 8(a)

Program, or unrestricted contracts. Also, the additional competition

for many of these procurements would likely result in a lower price to

the Government for procurements which have been set aside, but the SBA

is not able to quantify this benefit. Under the SBA's 7(a) Guaranteed

Loan Program, it is estimated that $9.2 million in new loans could be

made to these newly defined small businesses and an additional $2.7

million in loans under the Certified Development Company (504) Program.

(3) Description of Potential Costs of the Rule

The changes in size standards as they affect Federal procurement is

not expected to add any significant costs to the Government. As a

matter of policy, procurements may be set aside for small business or

under the 8(a) Program only if awards are expected to be made at

reasonable prices. Similarly, the rule should not result in any added

costs associated with the 7(a) and 504 loan programs. The amount of

lending authority SBA can make or guarantee is established by

appropriation. The competitive effects of size standard revisions

differ from those normally associated with other regulations which

typically burden smaller firms to a greater degree than larger firms in

areas such as prices, costs, profits, growth, innovation and mergers.

The change to size standards is not anticipated to have any appreciable

affect on any of these factors, although small businesses or 8(a) firms

much smaller than the size standard for their industries may be less

successful in competing for some Federal procurement opportunities due

to the presence of larger, newly defined small businesses. On the other

hand, with more and larger small businesses competing for small

business set-aside and 8(a) procurements, contracting agencies are

likely to increase the overall number of contacting opportunities

available under these programs. In addition, the new size standards, if

adopted, would not impose a regulatory burden because they do not

regulate or control business behavior.

(4) Description of the Potential Net Benefits From the Rule

Based on the above discussion, SBA believes that, because the

potential costs of this rule are minimal, the potential net benefits

would be approximately equal to the total potential benefits. Most of

the impact of this rule will appear in the Federal procurement area.

(5) Description of Reasons Why This Action is Being Taken and

Objectives of Rule

The SBA has provided in the supplementary information a statement

of the reasons why these new size standards should be established and a

statement of the reasons for and objectives of this rule.

For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,

the SBA certifies that this rule would not impose new reporting or

recordkeeping requirements, other than those required of SBA. For

purposes of Executive Order 12612, the SBA certifies that this rule

does not have any federalism implications warranting the preparation of

a Federalism Assessment. For purposes of Executive Order 12778, the SBA

certifies that this rule is drafted, to the extent practicable, in

accordance with the standards set forth in section 2 of this order.

List of Subjects in 13 CFR Part 121

Government procurement, Government property, Grant programs--

business. Loan programs--business. Small business.

Accordingly, part 121 of 13 CFR is proposed to be amended as

follows:

PART 121--[AMENDED]

1. The authority citation of part 121 continues to read as follows:

Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), and 644(c), and

662(5).

Sec. 121.201 [Amended]

2. In Sec. 121.201, in the table ``Size Standards by SIC

Industry,'' under the heading DIVISION I--SERVICES, is amended by

revising the entries corresponding to 8711, 8712, and 8713 to read as

follows:

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8711 Engineering Services.................................. $7.5

Military and Aerospace Equipment and Military Weapons.. 20.0

Contracts and Subcontracts for Engineering Services

Awarded Under the National Energy Policy Act of 1992.. 20.0

Marine Engineering and Naval Architecture.............. 13.5

8712 Architectural Services (Other than Naval)............. 5.0

8713 Surveying Services.................................... 3.5

Dated: December 23, 1997.

Aida Alvarez,

Administrator.

[FR Doc. 98-2609 Filed 2-2-98; 8:45 am]

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