Several years ago, Congress passed the Small Business Runway Extension Act of 2018 which required the U.S. Small Business Administration (SBA) to change its regulations. This change required the SBA to use a five-year average to calculate a company’s average annual receipts instead of the three-year average that SBA had been using for decades. In 2019, SBA implemented a Final Rule to implement the statute. The Final Rule provided for a transition period in which a company could choose to use a three-year period or a five-year period to calculate the company’s average annual receipts. That transition period ends January 6, 2022. Stated differently, once the clock strikes midnight on January 6, 2022, all concerns certifying their size after January 6, 2022 must calculate their average annual receipts using their revenue from the last five years.
This development is significant for contractors that compete for small business set-aside contracts with revenue-based size standards. Each solicitation for a federal contract is assigned a North American Industry Classification System (NAICS) code and each NAICS code has a corresponding size standard. Size standards are based on either a company’s average annual receipts or the company’s average number of employees. Revenue-based size standards are used for contracts that contemplate the acquisition of services, and employee-based size standards are used for manufacturing contracts. When SBA determines a company’s size under a receipts-based sized standard, it looks to the company’s average annual receipts. If the company’s average annual receipts exceed the NAICS code assigned to the solicitation, they are considered other-than-small and ineligible for award. Eliminating the option to use a three-year period to calculate a firm’s average annual receipts may make it difficult for some companies to qualify as small.
The 2021 National Defense Authorization Act (NDAA) similarly amended the Small Business Act to change the calculation period for employee-based size standards from 12 months to 24 months. The NDAA made the change effective on January 1, 2022 and while a Proposed Rule to implement the change was issued by SBA in early November 2021, the Proposed Rule has not yet been made final, leaving in place once again a disconnect between law and SBA regulations.
If you have any questions about this legal update or need assistance understanding your obligations under SBA’s regulations please contact the Government Contracts group.
