Recent SBA Developments

November 19, 2019

By: John Carpenter, Principal, Brynn McNeil, Partner, Eric Poppe, Senior Manager

In October, Cherry Bekaert presented a webinar on recent Small Business Administration (“SBA”) statutory and regulatory changes. The webinar is available for on-demand listening on our website. This article provides a summary of the information discussed in the webinar.

While several topics were covered, the topic that seems to have been of the most interest to participants is the change in the number of years that will be used to determine a contractor’s size when a revenue bases size standard is involved. In this regard, in July 2018, the Small Business Runway Extension Act of 2018 (“Act”) was introduced. The sole action to be accomplished by this Act was to extend the period for determining size based on revenue from three years to five 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. Unfortunately, in SBA’s opinion, Congress amended the wrong section of the Small Business Act while attempting to achieve this goal.

The Small Business Act gives the SBA the authority to establish government-wide size standards. In another section, the Act gives agencies the right to ask the SBA to establish special size standards for them. It was this latter section that Congress amended when it passed the Act. Thus, in SBA’s view, that Act did not apply to SBA’s government-wide size standards.

Although the Act did not affect SBA’s government-wide size standards, in order to have uniform size requirements, SBA published a proposed rule to implement the Act in the June 19, 2019 Federal Register. In addition to extending the revenue calculation period to five years, the proposed rule makes other changes to the way revenue is calculated. For example, the proposed rule would eliminate consideration of the IRS Schedule K when calculating revenue for S corps. Also, the proposed rule would change the way revenue of a division that is sold or acquired in a calculation period is treated. For a division that is sold, revenue would be counted up to the point of sale. For a division that is acquired, revenue would only be counted after the acquisition.

In TechAnax, LLC; Rigil Corporation, B-408685.22; B-408685.25 (August 16, 2019) the protesters argued that the Act was self-executing and that the contracting agency (the General Services Administration) should apply the five year period in determining an offeror’s size. The Government Accountability Office (“GAO”) sought SBA’s view on this and SBA restated its position that the Act did not affect government-wide size standards, therefore, rulemaking was necessary before the Act could be implemented. GAO gave deference to SBA in this regard and denied the protest.

By law, the SBA is required to adjust revenue based size standards for inflation every five years. In another rulemaking that should be of interest to small business concerns, the SBA made such an adjustment in the July 18, 2019 Federal Register. This notice requested public comments on the adjustments and stated that the adjustments may be further adjusted depending on the public comments and other information. In the meantime, the interim adjustments are effective beginning August 19, 2019. Contractors should use the new size standards when submitting proposals on or after that date. Further, these revised size standards are to be used when a contractor has to recertify its size in accordance with Federal Acquisition Regulation (“FAR”) 52.219-28 after August 19, 2019. Finally, contractors should review their System for Award Management (“SAM”) data and make any needed changes using the new size standards.

Finally, changes were made to SBA and Department of Veterans Affairs (“VA”) rules that affect Service-Disabled Veteran-Owned Small Businesses (“SDVOSBs”) and Veteran-Owned Small Businesses (“VOSBs”) seeking to do business with the VA. By law, the VA is to give a contracting preference to these small business categories over other small business categories. For years, SBA and VA had different criteria for determining which concerns qualified as an SDVOSB or a VOSB. However, the 2017 NDAA required the SBA to issue uniform rules for determining who owned and controlled these concerns. Those rules were issued in September 2018, and became effective on October 1, 2018. Under the new rules, while the SBA establishes the criteria for who owns and controls a concern, the VA makes this determination using the SBA criteria. If there is a dispute between a contractor and VA concerning these issues, the matter is to be determined by the SBA’s Office of Hearings and Appeals.

If you have questions concerning any of these issues or other small business contracting matters, do not hesitate to contact Cherry Bekaert for advice and assistance.