For government contracting purposes, there are two tests for determining whether a concern is a small business, a revenue test and an employee test. For the revenue test, SBA rules (13 CFR §121.104) have required that a concern’s size status be determined by the average revenue of the concern and all its affiliates for the last three fiscal years of the concern. This revenue test was based on a section of the Small Business Act, 15 U.S.C. §632, which provides in part that
no Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern, unless such proposed size standard-
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(ii) provides for determining-
(I) the size of a manufacturing concern as measured by the manufacturing concern’s average employment based upon employment during each of the manufacturing concern’s pay periods for the preceding 12 months;
(II) the size of a business concern providing services on the basis of the annual average gross receipts of the business concern over a period of not less than 3 years;
(III) the size of other business concerns on the basis of data over a period of not less than 3 years;
It should be noted that subsections (ii)(II) and (III) used the phrase “not less than three years.” Thus, the SBA had the discretion to use a longer period to determine a concern’s size status. However, the SBA chose not to exercise this discretion and used the minimum period required by statute to determine a concern’s size status.
The use of the minimum period to determine size led Congress to raise concerns as to whether this period was sufficient to allow firms to be capable of competing for government contracts after they were no longer small. In July 2018, the Small Business Runway Extension Act of 2018 was introduced. The sole statutory action to be accomplished by this Act was to extend the period for determining size based on revenue to five years from three years. The reason given for this extension was
[t]his modest modification of SBA’s size formula 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. This legislation will allow small businesses at every level more time to grow and develop their competitiveness and infrastructure, before entering the open marketplace. The bill will also protect federal investment in SBA’s small business programs by promoting greater chances of success in the middle market for newly-graduated firms, resulting in enhanced competition against large prime contractors.
The Act passed Congress on December 6, 2018, and was signed by President Trump on December 17, 2018, becoming effective law on the date of signing.
The Act is not self-executing and will require rule making by SBA. This should be a fairly simple matter because it will only require changing “three” to “five” wherever it appears in 13 CFR §121.104. Unfortunately, FAR 19.101 will also have to be amended to reflect this change. Again, this should be a simple fix, but the FAR Councils have shown a propensity to slow roll changes to the FAR that are driven by changes to SBA rules. However, there is always the possibility that agencies will issue deviations to the FAR to accommodate the SBA rule as DoD has done in regard to the revised SBA rules on the limitation on subcontracting for sole source and set aside contracts.
We think this will be very good news for many government contractors who are bumping up against the three-year revenue size standard. We will closely monitor when the SBA makes this rule change and subsequent actions by the FAR Councils.