One of the more significant developments in 2018 for both small business primes and large companies with small business subcontractors was the passage of the Small Business Runway Extension Act (the “Act”), which was signed into law December 17, 2018. The Act, in amending the Small Business Act, increases the look-back period for determining a contractor’s size status based on average annual revenues from three years to now five years. For many services-based procurements, a contractor must average its annual receipts over a certain period to determine if it falls under the revenue-based size standard for the opportunity, and if so, whether it is a small business for that contract. The Act expands this period from the prior period of three years to now five years. Although not without its detractors, the Act has generally been hailed as a positive, and much needed, development for contractors pursuing set aside contracts, because it gives them more room to grow, and remain small, in order to bid on and capture the increasingly complex requirements being procured by the government. The new law also allows contractors to even out a particular year of higher than average revenue with the revenues of more representative years and still remain small, thus resulting in a more accurate representation of the contractor’s size status.
So far so good, but a problem has arisen. In internal guidance provided by the SBA December 21, 2018, the SBA stated that the Act will not be effective until the SBA promulgates regulations to implement the now extended look-back period. Therein lies the problem, however, because it may take some time for the SBA to issue proposed, not to mention final, regulations and in the meantime, and until the SBA actually issues these new regulations, small business contractors and large primes with small business subcontractors are left wondering which period (three years or five) they should use. On the one hand, if an apparently successful contractor elects to calculate size status based on five years of revenue, the contractor may find itself the subject of a size appeal before the SBA by a disappointed bidder or another party. The appeal would argue that, absent implementing regulations by the SBA, the three-year look-back period still controls, and that under that standard, the contractor is other-than-small. Should the appeal be successful, the contractor would be hit with an adverse size determination by the SBA. On the other hand, if a contractor uses the three-year look-back period to calculate its average annual revenues, the contractor could still find itself in the middle of a size appeal that now argues that the contractor is other-than-small under the five-year look-back period. Either way, contractors pursuing set aside work are saddled with significant uncertainty, and one which may have a substantial impact on the contractor beyond the instant procurement being protested. For example, if a firm is found to be other-than-small by the SBA, not only is the contractor precluded from being awarded the contract, but the contractor will also be precluded from participating in any future procurements that carry the same or lesser standards until, and unless, the contractor has been recertified as small by the SBA. The contractor faces serious criminal penalties if it is not recertified beforehand.
So what are contractors to do with this uncertainty? The most conservative approach, of course, would be to ensure that your firm or your subcontractors are small under either the three or five-year look-back period, but that essentially negates the intended benefit of the new law. More realistically, contractors will need to prepare themselves for a protest, and after careful evaluation, decide whether to pursue a given opportunity. However, for contractors that choose to use a three-year period, they may well prevail in a protest before the SBA because the SBA has itself stated that the five-year period will not begin to apply until new rules to implement the requirement have been issued. Interestingly, contractors who choose to use a five-year period may also ultimately prevail in a size protest due to the many court decisions stating that a statute like the Act without an effective date goes into immediate effect upon the statute’s passage. While the SBA Area Office that initially hears the protest may not agree, there is a good chance that the Office of Hearings and Appeals may reverse the Area Office on appeal. So, it’s a perfect mess, but one which we can hope will be sorted out sooner rather than later by the SBA. Stay tuned.