Small business federal contractors with annual revenues close to a relevant size standard should carefully review two important recent developments. The Small Business Administration (the “SBA”) adjusted its size standards, so that every size limit is now higher and the SBA will now average annual revenues over the preceding five years of operating rather than the previous three, as currently measured.  

So small business federal contractors, or firms that recently outgrew size limits for qualifying as small businesses, should carefully review their status in light of these two significant changes. These changes may enable firms to qualify as small businesses for longer than originally anticipated, or possibly even regain small business status after outgrowing it. On the other hand, firms with declining revenues may take longer to regain small business status.

Size limits adjusted, effective August 19, 2019

SBA adjusted its size standards for inflation, raising the size limit for every category of small business.

84 Fed.Reg. 34261, 34263 (July 18, 2019). The complete list of industries, including updated size standards, continues to appear in SBA’s regulations. 13 CFR §121.201.

Small business size standards based upon numbers of employees were not affected by this change.

Average annual revenues over how many years?

The Small Business Runway Extension Act of 2018 (the “Runway Extension Act”) became law on December 17, 2018. Pub. L. 115-324 (Dec. 17, 2018). The Runway Extension Act directs that firms average annual revenues over the most recent five years, rather than three, when comparing to the currently applicable size standard.

But when does the change become effective? SBA takes the position that the law amended the wrong provision of the Small Business Act, and requires implementing regulations, so that the change does not become effective until SBA issues its regulations. In a recent bid protest decision, GAO said it would defer to SBA’s interpretation. TechAnax, LLC, et al., B-408685.22; B-408685.25 (Aug. 16, 2019).  

In any event, SBA did issue proposed regulations implementing the five-year average. 84 Fed. Reg. 29399 (June 24, 2019). SBA’s regulations will become effective when finalized, which might occur later this year or early next, but SBA is not subject to any time requirement, so presently there is no outside date by which  the five-year average calculation will become effective.

However, in the National Defense Authorization Act for Fiscal Year 2020, H.R. 2500, §872 (July 12, 2019), the House included a provision requiring SBA to finalize its regulations by December 17, 2019. No such provision is currently pending in the Senate version.

Therefore, although the five-year average will become the rule, the effective date remains uncertain.

Will a five-year average raise or lower average annual revenues?

For growing small businesses, a five year average will recapture older, lower-revenue years, lowering average annual revenues. Combined with higher size standards, many firms may plan to continue seeking small business awards, which under the three-year average may not have been possible.

On the other hand, for a firm with declining revenues, a five year average may recapture older years with higher revenues, raising average annual receipts. For those firms, the five-year average may delay reentry into small business status.

More time as a small business to prepare for full and open competition?

The combination of higher size standards, and the five-year average for annual receipts, may enable some or many firms to retain their status as a small business for one or more years longer than initially anticipated. Indeed, the Runway Extension Act is based upon the perceived need to afford smaller firms more time to prepare to compete with larger-firm competition.

Firms potentially affected should evaluate the impact of the two changes, determine for which years small business status might continue, and assess potential modifications in competitive strategy. The time to plan is now, because revenues from a fiscal year must be included as soon as it is completed, even if tax returns or financial statements have not yet become available. 13 CFR §121.104.

Miles & Stockbridge attorney instrumental in securing passage of Runway Extension Act.

The Montgomery County (Maryland) Chamber of Commerce Government Contractor Network (GovConNet) led the planning and legislative support for the Runway Extension Act. GovConNet has now established itself as a national thought leader on small business procurement legislation and regulation.

The Miles & Stockbridge Government Contracts legal team is proud to be an active participant in GovConNet’s managing council, and is very proud that our own Stephen P. Ramaley testified in support of the legislation, and was instrumental in securing its passage.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

[View source.]