January 16, 2019
On Dec. 17, 2018, President Trump signed the Small Business Runway Extension Act of 2018 into law. It amends § 3(a)(2)(C)(i)(II) of the Small Business Act “by striking ‘3 years’ and inserting ‘5 years,’” so a contractor’s size will be measured by the annual average of its previous five years’ revenue, instead of the annual average of its previous three years’ revenue.
Notably, the amendment does not alter employee-based size standards, or the definition of a small business concern using a headcount rather than average revenue.
In a recently issued SBA information notice, the Small Business Administration (SBA) indicated its position that the new five-year average is not effective until SBA issues a formal rule implementing the statute. While this legal theory may be open to challenge, it is important to note that SBA’s position would require that current contracts and solicitations continue to use the old three-year average until completion of the formal rulemaking process.
According to a House Committee on Small Business report on the bill before its Dec. 17 signing, the purpose of the amendment is to “help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.” Since many small businesses have initially lean operating years, this change may allow overgrown businesses (i.e., other than small business concerns) to potentially qualify as small businesses when their earlier revenue is considered.
At the same time, if a qualified small business concern had higher revenues in, e.g., 2013 and 2014, it may no longer qualify as a small business concern when the two additional years’ revenue is added and measured against the applicable size standard(s) for the applicable revenue-based NAICS code(s). Pursuant to the Federal Acquisition Regulation (FAR), a change in size status “does not change the terms and conditions of the contract,” but the contracting officer “may require a subcontracting plan for a contract containing 52.219-9, Small Business Subcontracting Plan, if a prime contractor’s size status changes from small to other than small as a result of a size representation.”
The statutory amendment is intriguing, given SBA’s opposition to the change. On April 27, 2018, the SBA responded to a comment proposing a change in calculating average annual receipts using a five-year period rather than a three-year period. The commenter claimed that the change “would allow small businesses to plan and increase capacity before entering full and open competition and provide longer transition time from small business status to other than small business status.” SBA rejected that comment in the following response:
SBA does not adopt this comment. SBA believes that calculating average annual receipts over three years ameliorates fluctuations in receipts due to variations in economic conditions. SBA maintains that three years should reasonably balance the problems of fluctuating receipts with the overall capabilities of firms that are about to exceed the size standard.
Notwithstanding SBA’s stated opposition to the change, the bill passed in the House on Sept. 25 and in the Senate on Dec. 6. The bill went to President Trump’s desk on Dec. 11 and went into immediate effect on Dec. 17 when he signed it.
Ultimately, the Small Business Administration will need to update its size regulations — particularly, 13 C.F.R. § 124.104 — to resolve the inconsistency and clarify that the measurement period is five years, not three. There is no forecast as to when SBA will implement this change to its regulations, nor any indication of whether a similar revision will be made to FAR provisions, including FAR Part 19, on the subject of small businesses. (FAR 19.101(1)-(2) defines “Annual receipts” in terms of the concern’s “annual average gross revenue of the concern taken for the last 3 fiscal years.”)
For now, small businesses and overgrown, other than small business concerns operating in the federal contracting arena should consider recalculating their revenue over the past five years, and determine whether they meet the requirements to properly self-certify as small under any revenue-based NAICS Code they work under, and any SBA-administered program (e.g., 8(a), HUBZone and Economically-Disadvantaged Women-Owned Small Business). However, contractors should not be surprised to see contracting officers and SBA representatives continue to apply the old three-year average until a new SBA rule is implemented.
Given the harsh penalties for contractors who knowingly misrepresent their size for purposes of a procurement, it is crucial for all potentially affected businesses to understand the risks involved with aggressively applying the new five-year rule. (See FAR 19.301-1(d), which states: “The SBA’s regulations on penalties for misrepresentations and false statements are contained in 13 CFR 121.108 for small business, 13 CFR 124.501 for 8(a) small business, 13 CFR 124.1004 for small disadvantaged business, 13 CFR 125.29 for veteran or service-disabled veteran-owned small business, 13 CFR 126.900 for HUBZone small business, and 13 CFR 127.700 for economically disadvantaged women-owned small business concerns and women-owned small business (WOSB) concerns eligible under the WOSB Program.”)
As always, if a business determines that it no longer qualifies as small for certain NAICS code(s), or now qualifies as small under applicable NAICS code(s), the business must promptly update its certifications and representations on the System for Award Management and other federal procurement databases that rely upon self-reporting of small business status.
McGuireWoods has extensive experience advising clients on small business compliance matters, and has brought size protests on behalf of clients and defended protested concerns before SBA and its appellate authority, the Office of Hearings and Appeals. Please contact the firm’s government contracts team with any questions or to discuss further.