By Koprince Law, LLC on May 7, 2021
In January 2022, the rules regarding calculating small business size status for federal procurements will change dramatically. Companies operating under receipts-based size standards will be required to use their last five completed fiscal years–not three. And businesses operating under employee-based size standards will be made to use their last 24 months of payroll, instead of 12.
These changes will benefit growing businesses, allowing stay small longer by including older numbers in their averages. But the new size rules–what Congress has termed a small business “runway extension”–actually penalize some businesses, forcing them to stay large longer, and freezing these companies out of the very small business set-aside opportunities that could help reverse their declining fortunes. That can’t be what Congress intended!
Fortunately, the SBA has come up with a simple, elegant solution to the problem, and we think Congress should codify it before January.
The Runway Extension Act(s) and The “Shrinking Business” Problem
In case you’ve been busy doing other things (like running a business) instead of focusing on statutory and regulatory changes, it may be helpful to briefly summarize how we got here, along with an example of the major problem Congress has dumped in the laps of shrinking businesses. So let’s hop in our DeLorean, set the dials for December 2018, and fire up 1.21 gigawatts.
In the waning days of the year, Congress passed a bill called the “Small Business Runway Extension Act of 2018.” The bill amended the Small Business Act (the statute underpinning SBA’s regulations) by requiring the use of a five-year average in calculating size under receipts-based NAICS codes. Congress’s stated intent was, essentially, to allow businesses to stay small longer, thus increasing the number of companies eligible for small business set-aside contracts (and socioeconomic contracts like 8(a) and WOSB).
When a business is growing, the Runway Extension Act works exactly as intended. Here’s an example:
EXAMPLE #1 – Growing Small Business (“GrowCo”)
NAICS Code: 541310 (Architectural Services)
Size Standard: $8.0 million
FY 2016: $2 million; FY 2017: $3 million; FY 2018: $7 million; FY 2019: $10 million; FY 2020: $15 million
Average (Three-Year Lookback): $10.7 million
Average (Five-Year Lookback): $7.4 million
Nicely done, Congress! Our booming business, GrowCo, is still small under the 5-year standard even though it would have “sized out” under a three-year standard. So far, so good. But what about a shrinking company?
EXAMPLE #2 – Declining Large Business (“ShrinkCorp”)
NAICS Code: 541310 (Architectural Services)
Size Standard: $8.0 million
FY 2015: $20 million; FY 2017: $10 million; FY 2018: $7 million; FY 2019: $3 million; FY 2020: $2 million
Average (Three-Year Lookback): $4 million
Average: (Five-Year Lookback): $8.4 million
Uh-oh. Poor ShrinkCorp! Using a three-year average, this declining business is merely half as large as the size standard. But once we force the company to continue counting revenues back from its long-gone 2015 glory days, ShrinkCorp doesn’t qualify as small.
The Runway Extension Act only addressed receipts-based size standards, but Congress recently adopted a similar “runway extension” for employee-based size standards. We could go through a similar example, but you are smart and we don’t want to waste your time. You get the point: whether it’s a receipts-based size standard or an employee-based size standard, growing companies benefit from the lengthened calculation periods; shrinking companies are penalized. And, of course, even in the best of times, not all businesses are growing–and the pandemic hit many small businesses especially hard.
The SBA’s (Temporary) Solution
In 2019, the SBA issued a final rule implementing the receipts-based Runway Extension Act. The SBA’s rule allows a business to choose whether to use a three-year or five-year size standard.
By allowing businesses to choose which standard to apply, the SBA’s rule completely solves the problem. Under the SBA’s rule, a company like ShrinkCorp can simply select the three-year standard, and voila–small! Elegant in its simplicity!
The problem is that the SBA’s solution is temporary: it lasts only until January 6, 2022. After that, the SBA will begin using the five-year period exclusively. Meaning that come January, businesses like ShrinkCorp are gonna be in some trouble. And while there’s no good time to inadvertently penalize shrinking companies, the tail end of a pandemic seems particularly unfortunate.
A Congressional Solution?
If you have followed the Runway Extension Act saga, you may recall that SBA has claimed that the Act doesn’t apply to it. In other words, SBA says that it is voluntarily adopting the five-year standard, basically just to be neighborly–but it doesn’t have to do so. Following that logic, one might assume that SBA could decide by itself to extend the choice it offered in the 2019 rule.
In my mind, there is little doubt that Congress intended and expected the Runway Extension Act to apply to the SBA. (In fact, the stated purpose of the Act was to “lengthen the time in which the Small Business Administration (SBA) measures size through revenue…”) In fairness to the SBA, though, Congress didn’t do the best job drafting the Runway Extension Act to effectuate that intent, and a federal judge recently agreed with the SBA’s take. But Congress got the last laugh: as part of the 2021 National Defense Authorization Act, it changed the underlying statute to make it crystal clear that the mandatory five-year period will apply to the SBA no later than January 2022. (As will the 24-month period).
We occasionally have a bone to pick with the SBA, and when that happens, I’m not shy about saying so. But sometimes (many times!), the SBA gets it completely right. Allowing the choice between three-year and five-year periods is one of those times! SBA’s temporary solution allows growing businesses to stay small longer, without unnecessarily penalizing shrinking businesses.
Simple and fair.
Since we do not believe that the SBA has authority to extend its temporary solution, it’s up to our elected officials to protect declining businesses, including the many that have been severely harmed by the pandemic. Congress should amend the Small Business Act to permanently codify the three-or-five-year choice the SBA now allows. And Congress should allow a similar choice between 12-month and 24-month periods for companies operating in employee-based NAICS codes.
We’ve got my fingers crossed.
To learn more about the implications of the Runway Extension Act and SBA Regulatory Rules coming down the pipeline, look out for Koprince Law’s Managing Partner, Shane McCall’s appearance on our next episode of The New Normal in Government Contracting!
About the Authors
Steven J. Koprince is the founder of Koprince Law LLC and a Senior Partner at the firm, practicing law on a part-time basis. Steven’s legal practice focuses exclusively on providing comprehensive legal services to federal government contractors. Steven has worked with hundreds of companies to help them achieve their government contracting goals.
Shane McCall is Managing Partner at Koprince Law and Editor of SmallGovCon. He has run the SmallGovCon blog since taking it over from Steven Koprince. He recently published the “Koprince Law LLC GovCon Handbook Volume 5: Procedures and Pitfalls of Size Protests and Appeals.” Shane has helped many companies navigate federal contracting issues through advice, drafting of documents, and administrative litigation.