United States: SBA Disappoints Many Growing Small Businesses By Stating That The New Statutory Five-Year Measurement Period For Small Business Eligibility Is Not Effective Yet

Late last year, President Trump signed into law H.R. 6330, the Small Business Runway Extension Act of 2018 (the "Runway Extension Act"). As detailed in our client alert on the Runway Extension Act, this law extends the measurement period for determining whether a contractor qualifies as a small business concern under revenue-based size standards from an average of the most recently completed five fiscal years, rather than the long-standing three-year measurement period. It is anticipated that many growing firms, which had or would soon come to exceed the revenue threshold applicable to their principal NAICS code(s), will gain additional years of "small business" status by including (often much lower) revenue totals from 4 and 5 years ago to determine their average annual revenue.

We noted that the Runway Extension Act amends the Small Business Act without expressly requiring implementation by the Small Business Administration (SBA), thereby allowing contractors reasonably to take the position that the Runway Extension Act is immediately effective, absent contrary guidance from the SBA. In a move sure to disappoint the many small but growing services firms that Congress intended to help by passing the Runway Extension Act, SBA has now issued such contrary guidance.

Specifically, on December 21, 2018, SBA published an Information Notice addressed to all SBA Office of Government Contracting and Business Development (GCBD) employees stating that 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." ¹ Thus, "[u]ntil SBA changes its regulations, businesses still must report their receipts based on a three-year average." SBA bases its position on the fact that the Runway Extension Act does not expressly include an effective date or make a five-year average effective immediately. SBA's position is in the form of agency-internal guidance and also appears inconsistent with applicable federal court holdings on statutory construction. Notwithstanding, contractors should assume that SBA will seek to enforce the three-year measurement period reflected in current SBA regulations until such time as SBA issues new interim or final regulations implementing the Runway Extension Act.

It could take weeks, months or even longer for SBA to issue regulations implementing the five-year measurement period. Until such regulations issue, contractors may be best served to conform to SBA's stated position on the effective date, however questionable the basis for it may be. To the extent that contractors elect to bid on set-aside solicitations on the assumption that the five-year measurement period is already effective, they would be well-advised to explicitly state this in the applicable proposal or certificate submitted to the contracting agency with their proposal response. While this may increase the possibility of a size protest or other contracting agency inquiry to the SBA, an express statement that the certification is premised upon the Runway Extension Act's five-year measurement period should mitigate against allegations of contractor misrepresentation or fraud relating to their proposal submissions.

Read the full SBA notice here.

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