Small business size standards: Security guards and patrol services,
[Federal Register: November 10, 2005 (Volume 70, Number 217)]
[Proposed Rules]
[Page 68368-68374]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10no05-19]
SMALL BUSINESS ADMINISTRATION
RIN 3245-AF28
Small Business Size Standards; Security Guards and Patrol Services
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
SUMMARY: The U.S. Small Business Administration (SBA) proposes to increase the size standard for the Security Guards and Patrol Services Industry (North American Industry Classification System (NAICS) 561612)
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from $10.5 million in average annual receipts to $15.5 million. The proposed revision is being made to better define the size of business in this industry based on a review of industry characteristics.
DATES: Comments must be received by SBA on or before December 12, 2005.
ADDRESSES: You may submit comments, identified by RIN 3245-AF28 by any of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments;
(2) Fax: (202) 205-6390; or (3) Mail/Hand Delivery/Courier: Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW., Mail Code 6530, Washington, DC 20416.
FOR FURTHER INFORMATION CONTACT: Carl Jordan or Diane Heal, Office of Size Standards, (202) 205-6618 or sizestandards@sba.gov.
SUPPLEMENTARY INFORMATION: The U.S. Small Business Administration (SBA) has received requests from firms in the Security Guards and Patrol Services Industry (referred to as the Security Guards Industry) to review the current $10.5 million size standard. This size standard was last revised in 2002 to incorporate an inflation adjustment to receipt- based size standards (67 FR 3041, January 23, 2002). These firms believe that a size standard increase is warranted due to the increased costs of complying with Federal agency requirements for security guards, increased number of large security firms competing for Federal contracts, and the relative success by large firms in winning Federal contracts. These firms also believe that these industry trends would shrink the pool of eligible small businesses causing Federal agencies to scale back their use of small business preferences in Federal procurement. Below is a discussion of the methodology used by SBA to review its size standards, and the analysis leading to the proposal to increase the Security Guards Industry's size standard to $15.5 million.
Size Standards Methodology: Congress granted SBA discretion to establish detailed size standards (15 U.S.C. 632(a)(2)). SBA's Standard Operating Procedure (SOP) 90 01 3, ``Size Determination Program'' (available on SBA's web site at http://www.sba.gov/library/soproom.html ) describes four factors for establishing and evaluating
size standards: (1) The structure of the industry and its various economic characteristics; (2) SBA program objectives and the impact of different size standards on these programs; (3) whether a size standard successfully excludes those businesses which are dominant in the industry; and (4) other factors if applicable. Other factors, including the impact on other Federal agencies' programs, may come to the attention of SBA during the public comment period or from SBA's own research on the industry. No formula or weighting has been adopted so that the factors may be evaluated in the context of a specific industry. Below is a discussion of SBA's analysis of the economic characteristics of an industry, the impact of a size standard on SBA programs, and the evaluation of whether a firm at or below a size standard could be considered dominant in the industry under review.
Industry Analysis: Section 3(a)(3) of the Small Business Act (15 U.S.C. 632 (a)(3)), requires that size standards vary by industry to the extent necessary to reflect differing industry characteristics. SBA has two ``base'' or ``anchor'' size standards that apply to most industries--500 employees for manufacturing industries and $6 million in average annual receipts for nonmanufacturing industries. SBA established 500 employees as the anchor size standard for the manufacturing industries at SBA's inception in 1953 and shortly thereafter established a $1 million average annual receipts size standard for the nonmanufacturing industries. The receipts-based anchor size standard for the nonmanufacturing industries has been adjusted periodically for inflation so that, currently, the anchor size standard is $6 million. Anchor size standards are presumed to be appropriate for an industry unless its characteristics indicate that larger firms have a much greater significance within that industry than the ``typical industry.''
When evaluating a size standard, the characteristics of the specific industry under review are compared to the characteristics of a group of industries, referred to as a ``comparison group.'' A comparison group is a large number of industries grouped together to represent the typical industry. It can be comprised of all industries, all manufacturing industries, all industries with receipt-based size standards, or some other logical grouping.
If the characteristics of a specific industry are similar to the average characteristics of the comparison group, then the anchor size standard is considered appropriate for the industry. If the specific industry's characteristics are significantly different from the characteristics of the comparison group, a size standard higher or, in rare cases, lower than the anchor size standard may be considered appropriate. The larger the differences between the specific industry's characteristics and the comparison group's characteristics, the larger the difference between the appropriate industry size standard and the anchor size standard. SBA will consider adopting a size standard below the anchor size standard only when (1) all or most of the industry characteristics are significantly smaller than the average characteristics of the comparison group, or (2) other industry considerations strongly suggest that the anchor size standard would be an unreasonably high size standard for the industry under review.
The primary evaluation factors that SBA considers in analyzing the structural characteristics of an industry include average firm size, distribution of firms by size, start-up costs, and industry competition (13 CFR 121.102(a) and (b)). SBA also examines the possible impact of a size standard revision on SBA's programs as an evaluation factor. SBA generally considers these five factors to be the most important evaluation factors in establishing or revising a size standard for an industry. However, it will also consider and evaluate other information that it believes relevant to the decision on a size standard for a particular industry. Public comments submitted on proposed size standards are also an important source of additional information that SBA closely reviews before making a final decision on a size standard. Below is a brief description of each of the five evaluation factors.
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``Average firm size'' is simply total industry receipts (or number of employees) divided by the number of firms in the industry. If the average firm size of an industry is significantly higher than the average firm size of a comparison industry group, this fact would be viewed as supporting a size standard higher than the anchor size standard. Conversely, if the industry's average firm size is similar to or significantly lower than that of the comparison industry group, it would be a basis to adopt the anchor size standard or, in rare cases a lower size standard.
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``Distribution of firms by size'' is the proportion of industry receipts, employment, or other economic activity accounted for by firms of different sizes in an industry. If the preponderance of an industry's economic activity attributed by smaller firms, this tends to support adopting the anchor size standard. A size standard higher than the anchor size standard is supported for an industry in which the distribution of firms indicates that economic activity
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is concentrated among the largest firms in an industry.
In this proposed rule, SBA examines the percent of total industry sales cumulatively generated by firms up to a certain level of sales. For example, assume for the industry under review that 30 percent of total industry sales are generated by firms of less than $10 million in sales. This statistic is compared to a comparison group. For the nonmanufacturer anchor comparison group (used in this proposed rule), firms of less than $10 million in sales cumulatively generated 49.4 percent of total industry sales. Viewed in isolation, the lower figure for the industry under review indicates the presence of larger-sized firms in this industry than firms in the industries in the nonmanufacturing anchor size standards comparison group and, therefore, a higher size standard may be warranted.
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``Start-up costs'' affect a firm's initial size because entrants into an industry must have sufficient capital to start and maintain a viable business. To the extent that firms entering into one industry have greater financial requirements than firms do in other industries, SBA is justified in considering a higher size standard. In lieu of direct data on start-up costs, SBA uses a proxy measure to assess the financial burden for entry-level firms. For this analysis, SBA has calculated average firm assets within an industry. Data from the Risk Management Association's Annual Statement Studies, 2000-2001, provide average sales to total assets ratios. These were applied to the average receipts size of firm in an industry to estimate average firm assets. An industry with a significantly higher level of average firm assets than that of the comparison group is likely to have higher start-up costs, which would tend to support a size standard higher than the anchor size standard. Conversely, if the industry showed a significantly lower level of average firm assets when compared to the comparison group, the anchor size standard would be considered the appropriate size standard, or in rare cases a lower size standard.
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``Industry competition'' is assessed by measuring the proportion or share of industry receipts obtained by firms that are among the largest firms in an industry. In this proposed rule, SBA compares the proportion of industry receipts generated by the four largest firms in the industry--generally referred to as the ``four-firm concentration ratio''--to the average four-firm concentration ratio for industries in the comparison groups. If a significant proportion of economic activity within the industry is concentrated among a few relatively large producers, SBA tends to set a size standard relatively higher than the anchor size standard in order to assist firms in a broader size range to compete with firms that are larger and more dominant in the industry. In general, however, SBA does not consider this to be an important factor in assessing a size standard if the four-firm concentration ratio falls below 40 percent for an industry under review.
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``Impact of a size standard revision on SBA programs'' refers to the possible impact a size standard change may have on the level of small business assistance. This assessment most often focuses on the proportion or share of Federal contract dollars awarded to small businesses in the industry in question. In general, the lower the share of Federal contract dollars awarded to small businesses in an industry which receives significant Federal contracting revenues, the greater is the justification for a size standard higher than the existing one.
Another factor to evaluate the impact of a proposed size standard on SBA's programs is the volume of guaranteed loans within an industry and the size of firms obtaining those loans. This factor is sometimes examined to assess whether the current size standard may be restricting the level of financial assistance to firms in that industry. If small businesses receive significant amounts of assistance through these programs, or if the financial assistance is provided mainly to small businesses much lower than the size standard, a change to the size standard (especially if it is already above the anchor size standard) may not be necessary.
Evaluation of Industry Size Standard: The two tables below show the industry structure characteristics for the Security Guards Industry and for two comparison groups. The first comparison group is comprised of all industries with a $6 million receipts-based size standard referred to as the nonmanufacturing anchor group. Since SBA's size standards analysis is assessing whether the Security Guards Industry's size standard should be moderately higher, or much higher than the nonmanufacturing anchor size standard, this is the most logical set of industries to group together for the industry analysis. In addition, this group includes a sufficient number of firms to afford a meaningful assessment and comparison of industry characteristics. The second comparison group consists of the nonmanufacturing industries with the highest receipt-based size standards established by SBA. SBA refers to this comparison group as the ``nonmanufacturing higher-level size standard group.'' This group's size standards range from $21 million to $30 million. If an industry's characteristics are significantly larger than those of the nonmanufacturing anchor group, SBA will compare them to the characteristics of the higher-level size standards group. By doing so, SBA can assess whether a size standard should be among the highest size standards or somewhere between the anchor size standard and the highest size standards.
For its analysis, SBA examined 2002 industry data prepared for SBA's Office of Advocacy by the U.S. Bureau of the Census (http://www.sba.gov/advo/research/us_rec02.txt ), data from a U.S. Bureau of
the Census report ``Investigation and Security Services: 2002'', (Report EC02-561-06), and data from the Risk Management Association's Annual Statement Studies, 2000-2001. SBA also examined Federal contract award data for fiscal years 2002-2004 from the U.S. General Service Administration's Federal Procurement Data Center, and SBA's internal loan database on SBA guaranteed loans during fiscal year 2004.
Security Guards Industry Structure Considerations: Table 1 shows data on three evaluation factors for the Security Guards Industry and the two comparison groups. These factors are average firm size, average firm assets, and the four-firm concentration ratio.
Table 1.--Selected Industry Characteristics by Industry Category
Four-firm Average firm Average firm concentration Industry category
size receipts assets
ratio (millions) (millions) (percent)
Security Guards and Patrol Services.............................
$2.81
$0.43
32.7 Nonmanufacturing Anchor Group...................................
1.29
0.60
14.4
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Higher-level Size Standard Group................................
4.73
2.00
26.4
For the Security Guards Industry, its average firm size in receipts is more than twice that of the average firm size in the nonmanufacturer anchor group, but significantly lower than the average firm size in the higher-level size standards group. This factor indicates a size standard within a range of $13 to $15 million may be appropriate, which is slightly more than double the $6 million anchor size standard. The average firm assets factor is below the nonmanufacturing anchor group and does not provide a basis for increasing the current size standard. The four-firm concentration ratio provides some support for a change to the current size standard. While the factor is appreciably higher than the average industry in the two comparison groups, it is not at a sufficient level to suggest that larger firms in the industry could control the industry through pricing or other forms of collaboration nor that a very substantial increase to the size standard should be considered. In relation to the higher-level size standards group, the four-firm concentration ratio suggests a standard higher than $10.5 million is reasonable. The level of the size standard, however, should be based on the consideration of the other evaluation factors.
Table 2 below examines the size distribution of firms. For this factor, SBA evaluates the percent of total sales cumulatively generated by firms at or below specific receipts sizes. For example, firms in the Security Guards Industry with $10 million or less in receipts cumulatively obtained 27.1 percent of total industry sales. Within the nonmanufacturing anchor group, these size firms captured 49.4 percent of total industry sales while similar firms in the higher-level size standards group captured 21.1 percent.
Table 2.--Percentage Distribution of Firms by Receipts Size
Percent of industry sales by firm of Industry category
