As detailed in our previous alert , when the Small Business Runway Extension Act of 2018 (the “Act”) became law in December 2018, the Small Business Administration (“SBA”) declared that the Act would not be effective until the SBA issued implementing regulations through the formal rule-making process. As background, the Act extends the measurement period for determining whether a contractor qualifies as a small business concern under revenue-based size standards to an average of the most recently completed five fiscal years, rather than the three previous fiscal year period that the SBA currently employs for this purpose. On June 24, 2019, the SBA finally issued a Proposed Rule to implement the Act.
Consistent with the Act, the Proposed Rule revises the measurement period for determining whether contractors qualify as a small business concern from three to five years. However, in a move sure to disappoint many contractors, the SBA will continue to apply the three-year measurement period pending its adoption of a Final Rule implementing the Act. Nor will the SBA apply the new five-year measurement period retroactively, reasoning that “size is determined when a firm certifies it size status as part of its initial offer.” The SBA’s delayed implementation of the Act appears inconsistent with Congress’ intent that the Act be treated as immediately effective. We note that on July 16, 2019, the House reaffirmed previous expressions of Congress’ intent in this regard (in an apparent rebuke to the SBA) by passing an amendment to the Act which, inter alia, confirms that the Act “has been effective since the date it was signed into law, on December 17, 2018.” The SBA’s Proposed Rule also clarifies that a contractor’s annual receipts would not be adjusted in the event that a contractor sells or acquires a segregable business division during the applicable period of measurement; in contrast, the receipts of a former contractor subsidiary that was a separate legal entity would not be included in the calculation.
Notwithstanding the delayed implementation, the Proposed Rule is a welcome development for small to mid-sized contractors that have seen recent growth in revenues, since the longer look-back period in the Proposed Rule would serve to lower their average annual receipts. Consequently, if the Proposed Rule is adopted as a Final Rule, mid-sized businesses that have recently exceeded size standards may be able to regain their small business status, and small businesses that are on the cusp of exceeding the size standard would often be able to maintain their status for longer.
Interested parties may submit comments to the proposed rule by August 23, 2019. Read the full SBA notice here .