On December 17, 2018, the Small Business Runway Extension Act of 2018 (“Act”) (H.R. 6330) was passed by President Trump into law. The new law amends the Small Business Act at 15 USC 632 to require that the size of a federal contractor for purposes of determining small business eligibility be measured based on the average of five years rather than three years of annual revenue. Ultimately, this increase in the Small Business Administration (“SBA”)’s look-back revenue period will allow more small businesses to qualify as “small” for federal contracting purposes for a longer period of time.
How does a federal contractor’s revenue impact its small business eligibility?
Under the Small Business Act, in order to qualify as a small business, a business must meet certain size standards based on the North American Industry Classification System (NAICS) code associated with its industry. SBA’s size standards are stated either in the number of employees or annual receipts. SBA’s size standard represents the largest size that a business (including its affiliates) may be in order to remain classified as a small business for federal contracting programs and set-asides. For example, the size standard for NAICS code 517410 (Satellite Telecommunications) is $32.5 million. In order for a satellite telecommunications company to be small its annual receipts, together with its affiliates, could not exceed $32.5 million.
What does the law change and how will it impact federal contractors?
Under the new law, the size of a federal contractor is calculated by SBA based on averaging its annual gross receipts over the past five years, up from three years, in order to determine its small business program eligibility under a receipts size standard.
Particularly, this amendment will benefit small businesses in industries subject to receipts based SBA size standards. For a number of smaller businesses, a longer look-back revenue review period will result in lower average annual receipts if it is able to include additional lower revenue years in the calculation.
The law aims to “help advanced-small contractors successfully navigate the middle market as they reach the upper limits of their small size standard.” See House of Representative Report 115-939 (“Report”). Many businesses face significant challenges when they outgrow their small business size status due to sudden rapid growth which typically occurs when a small business wins a large contract. The law’s increase in the revenue look-back period is “designed to reduce the impact of rapid-growth years which result in spikes in revenue that may prematurely eject a small business out of their small size standard.” Id. Contractors that become no longer small lose access to valuable set-aside contracts and SBA assistance and tend to experience difficulties in competing in the full and open federal marketplace with much larger businesses.
In order to help combat this problem, the law will provide more small businesses a longer small business eligibility “runway” which allows them more time to grow and “develop their competiveness and infrastructure” before they become other-than-small and are required to compete in the open market. Moreover, the law is aimed to “protect federal investments in SBA’s small business programs by promoting greater chances of success in the middle market for newly-graduated firms, enhancing competition against large prime contractors”. Id.
The new 5-year calculation period will not become effective until SBA revises its regulations. On December 21, 2018, SBA issued an internal Information Notice clarifying that the change is not effective immediately and is not applicable to present contracts, offers or bids. Therefore, until the regulations are amended, businesses still must report their receipts based on a three-year average. The revised regulations should be forthcoming and hopefully, will provide additional guidance on how the change will impact current and prospective federal contractors’ small business eligibility, including companies that have been in business for less than five years.