Carolyn R. Cody-Jones
The New Law
Shortly after passage by the Senate, President Trump signed the Small Business Runway Extension Act, P.L. No. 115-324, into law on December 17, 2018. The new law amends the Small Business Act to adjust the look-back period for calculating a company’s size based on average annual gross receipts from three years to five years.
Proponents of the law have lauded the assistance it will provide to growing small businesses, which in the past have been unceremoniously closed out of small business set-aside procurements before they have the resources to compete with larger government contractors. The longer look-back period benefits companies with lower revenue in prior years by allowing them to include those earlier years in calculating the company’s average annual receipts. The longer period also allows additional years of gross revenue to balance out a unique year of significant growth or income. Critics, however, worry this will hurt small businesses that must now compete with “larger” small businesses that remain eligible for small business set-aside procurements for longer. Indeed, prior to the introduction of the Small Business Runway Extension Act, the Small Business Administration (“SBA”) opposed a five-year look-back period in its April 2018 “Size Standards Methodology” paper, stating “[e]xtending the averaging period to five years would allow a business to greatly exceed the size standard for some years and still be eligible for Federal assistance, perhaps at the expense of other smaller businesses.” Other critics of the new law have pointed out that a five-year look-back will also harm businesses with declining revenue that will take longer to qualify for small business set-aside procurements.
On December 21, 2018, the SBA provided internal guidance on the new law, explaining that the Runway Extension Act was not presently effective and needs to be implemented in SBA regulations before it becomes controlling. The guidance further stated that SBA is presently drafting changes to its regulations and forms to implement the new law. Accordingly, until SBA changes its regulations businesses must still report their average annual receipts based on a three-year average. That said, the SBA has not yet publicly posted this guidance, and its position is potentially inconsistent with court decisions holding that legislation without an effective date takes effect upon enactment. See, e.g., Johnson v. United States, 529 U.S. 694, 702 (2000); Strategical Demolition Torpedo Co. v. United States, 110 F. Supp. 264, 265 (Ct. Cl. 1953).
Practical Takeaways
So, what is a small business contractor to do during this uncertain transition phase? First and foremost, companies bidding on small business procurements, as well as large contractors with small-business set-aside subcontractors as part of their proposals, should know what their size status is under both the three-year and five-year calculation methods.
If your business (or subcontractor) does not meet the size standard under one of these calculations, a risk assessment should be made about continuing with the procurement. Although the new law mandates a five-year calculation, contractors meeting the size standard under this method—where they do not qualify under a three-year period calculation—should consider that they may receive an adverse size determination from the SBA if they submit a proposal before new SBA regulations are issued. However, contractors seeking to take advantage of the new five-year calculation method before the new regulations are in place may have a meritorious appeal from any SBA adverse size determination, based on the court decisions dictating that legislation without an effective date goes into effect at the time of enactment. Conversely, even though the SBA’s current initial guidance suggests it will continue to use a three-year period until new regulations are formally put in place, businesses relying on the three-year calculation that do not qualify using the five-year period should consider that they may face an adverse determination that may not be successfully appealed. This all depends on future developments in the SBA implementation guidelines and any related litigation.
Whichever calculation method is formally employed for the proposal, the contractor should plainly assert the method used in certifying the size of the small business. Contractors may also consider requesting clarification from the contracting officer or their local SBA Area Office on the calculation method they should employ.
The SBA’s guidance may change, and we will continue to provide updates on how SBA implements the new law. Stay tuned for forthcoming posts reviewing the SBA’s proposed and final regulations.