SBA increases small business ‘runway’ with formal rule changes

Update 4/16/2020: The SBA has announced that funding for this program has run out and that it is no longer accepting new applications. Congressional efforts to increase funding are underway; we will provide additional information as it becomes available.

In December 2018, the Small Business Runway Extension Act of 2018 was enacted, which changed the requirements for proposed size standards prescribed by agencies that don’t have separate statutory authority to issue such standards. The intent of the law was to allow more time for small business government contractors to prepare for the transition from being a small business to being a large business competing for full and open awards. Due to this new legislation, the Small Business Administration (SBA) was required to issue a final rule implementing the act, and to implement a transition plan to facilitate compliance with the act’s requirements by contractors and federal agencies.

SBA issued for comment on June 24 a proposed rule that would “change its method for calculating average annual receipts for all SBA’s receipts-based size standards and other agencies’ proposed receipts-based size standards for firms in services industries from a 3-year averaging period to a 5-year averaging period,” according to the Federal Register. After careful consideration of the pros and cons, SBA issued its final rule on Dec. 5 to adopt the five-year “look-back” period for all receipts-based SBA size standards, and for all such standards prescribed by other agencies, effective Jan. 6, 2020. SBA also established a transition period through January 2022, during which firms (and their affiliates) can choose either a three-year or a five-year averaging period.

The primary beneficiaries of this rule change are small businesses that may have exceeded or are close to exceeding the size limitations under the three-year look-back period, which now will have additional time to operate as a small business because of a decrease in average receipts calculated over the new five-year requirement. Conversely, large businesses that have decreased revenues over the past several years and would qualify as a small business under the previous three-year requirement will now be prevented from being classified as a small business until they are able to qualify under the five-year average receipts requirement. 

The government contends that there should be more businesses that fall into the first category, thus positively impacting existing small government contractors, as well as providing a larger pool of contractors, which benefits the government from a competition standpoint and may lead to a larger number of small business set-aside awards.

The SBA also added language within the Code of Federal Regulations (CFR) stating that “the former affiliate rule does not permit a concern to adjust its receipts when the concern sells a segregable division that is not a separate legal entity,” according to the Federal Register. Essentially, if an affiliate is sold, the receipts are not included in the receipts calculation. If a division is sold, the receipts are included in the calculation.