We recently reported that, on December 17, 2018, President Trump signed into law a bill that amends the Small Business Act to require that the size of a federal contractor be measured by an average of five years—rather than three years—of revenue for the purpose of determining small business program eligibility. As commentators have noted, the bill did not have a specific effective date, and thus it should be presumed to be effective immediately under longstanding principles of statutory interpretation.
However, the Small Business Administration (SBA) very recently issued an Information Notice, which states:
SBA is receiving inquiries about whether the Runway Extension Act is effective immediately—that is, whether businesses can report their size today based on annual average receipts over five years instead of annual average receipts over three years. The Small Business Act still requires that new size standards be approved by the Administrator through a rulemaking process. The Runway Extension Act does not include an effective date, and the amended section 3(a)(2)(C)(ii)(II) does not make a five-year average effective immediately.
The change made by the Runway Extension Act is not presently effective and is therefore not applicable to present contracts, offers, or bids until implemented through the standard rulemaking process. The Office of Government Contracting and Business Development (GCBD) is drafting revisions to SBA’s regulations and SBA’s forms to implement the Runway Extension Act. Until SBA changes its regulations, businesses still must report their receipts based on a three-year average.
Interestingly, the SBA indicated in an April 2018 Federal Register notice that it was not in favor of changing the lookback period from three years to five years:
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. Extending 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. Such a change is more likely to benefit successful small business graduates by allowing them to prolong their small business status, thereby reducing opportunities for currently defined small businesses.
Thus, it is possible that the SBA’s seemingly unfavorable view of the of the Small Business Runway Extension Act informed its decision to issue the Information Notice—even though, as commenters have noted, the validity of the SBA’s position about the present effect (or lack thereof) of the Act is questionable.
The bottom line is this: The SBA presumably will update its regulations in the near future to include the five-year lookback period set forth in the Small Business Runway Extension Act. Accordingly, any confusion created by the SBA’s recent Information Notice hopefully will be ameliorated fairly soon. In the meantime, whether the three-year lookback period or five-year lookback period applies needs to be analyzed on a case-by-case, situation-by-situation, and company-by-company basis.
If you have any questions about any of the foregoing issues, please do not hesitate to contact Aron Beezley.