SBA Releases Final Rule Regarding Runway Extension Act, Extending Time Period for Measurement
On December 5, 2019, the Small Business Administration (SBA) issued its much-anticipated final rule1 by which it will implement the Small Business Runway Extension Act (Runway Act), which we discussed in prior Advisories (Turn Back the Clock: Congress Extends SBA's Runway for Small Business Size Status; SBA and Congress Tussle Over Small Business Runway Extension Act Effective Date, as SBA Issues Proposed Rule). This final rule, effective January 6, 2020, will formally apply the Runway Act's modification to the calculation methodology, for both SBA and other agencies, of average annual receipts for small businesses. The rule extends SBA's period of measurement of a contractor's size status from three to five years. The change to the period of measurement will be reflected in 13 C.F.R. § 121.104, "How does SBA calculate annual receipts?" and 13 C.F.R. § 121.903, "How may an agency use size standards for its programs that are different than those established by SBA?"
Significantly, SBA also adopted a transition period lasting until January 6, 2022, during which time small businesses may choose between using a three- or five-year averaging period when calculating their receipts for the purposes of meeting size standards. Following the end of the transition period, those firms with at least five years of experience will be required to use a five-year averaging period. The option to continue to use a three-year lookback period during the transition will be beneficial to small businesses that otherwise might have been displaced from their small business size standards by virtue of the increased window.
For example, a business that had a substantial, potentially abnormal increase in revenue four or five years previously based on a large contract or task order, but then experienced a subsequent downturn in revenue followed by incremental growth, might be other than small under the five-year period, but remain small under the three-year window. The transition period should ameliorate that potential issue and give small businesses additional time to adjust to the new calculation methodology.
SBA has taken the position that the Runway Act was not effective upon the Act's original passage in 2018, but rather would affect only the application of SBA's size standard rules after the effective date of the final rule. SBA's position was supported by the Government Accountability Office in a recent bid protest action, which found that "the Small Business Act requires the promulgation of regulations to give effect to the Runway Extension Act."2 Now, SBA has promulgated those regulations via this final rule.
The rule is intended to assist mid-sized businesses that have just exceeded the size standards to regain their small business status, and small businesses close to exceeding the applicable size standards to retain their small business status for a longer period. With the additional time in a protected status, emerging contractors can develop their capabilities, gain additional contract performance experience, and build out their resources, such that when they finally do enter the full-and-open market, they presumably will be better equipped to compete with large government contractors with sophisticated capabilities and a wide array of past performance experience. This five-year lookback will also extend the decision-making period for small businesses during which they must decide whether to attempt to curtail their growth in order to remain small, sell to a large business, or prepare to compete on the open market.
SBA's Section 7(a) Business Loan and Disaster Loan Program will not be affected by this rulemaking and any changes to that program will be affected through a separate rulemaking.
Going forward, small businesses should consider whether use of the three- or five-year lookback period is most advantageous during the transition period. Arnold & Porter will be addressing these and other strategic considerations under the new rule in briefings over the coming months. If you have questions in the meantime, please feel free to contact the authors of this Advisory.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.