For many small business government contractors, the winter holidays came early on December 5, 2019, when the Small Business Administration (“SBA”) issued its final rule adjusting its regulations on the calculation of average annual receipts in small business size determinations for revenue-based size standards. Since Congress passed the Small Business Runway Extension Act of 2018 (“Runway Extension Act” or “the Act”) last December, contractors, as well as their lawyers, have been patiently waiting for the SBA to implement the Act’s change to the review period for annual receipts from three years to five. While many were initially hopeful the Act would take immediate effect, SBA, and the Government Accountability Office (“GAO”), made it clear that before contractors could take advantage of the change, they would have to wait for the SBA to issue a final implementing rule. Now that SBA has issued the final rule, which will take effect on January 6, 2020, the wait is nearly over.
Similar to the proposed rule SBA issued on June 24, 2019, which we discussed in an earlier blog, the final rule changes the averaging period for all industries subject to SBA’s receipts-based size standards. However, the final rule also adopts “the same 5-year averaging period for both services and non-services industries when approving receipt-based size standards by other federal agencies” (emphasis added). In other words, both service and non‑service industries that have a corresponding receipts-based size standard for any federal agency will now have their size calculated based upon the average annual receipts for the preceding five years instead of three. That said, SBA clarified that the change does not apply to the Business Loan and Disaster Loan Programs.
During the comment period, the SBA received overwhelming support for the change to a five-year averaging period. However, some commenters raised concerns that this change could also cause certain small businesses to lose their size status prematurely. For example, some entities had declining revenues over the previous five years and would exceed the size standard if the fourth and fifth years’ receipts were added the previous three. Moreover, once these entities lost their status, the longer averaging period would mean these entities would have a longer wait to requalify as small. Recognizing these concerns, the final rule also provides that until January 6, 2022, contractors may choose either a three- or five‑year averaging period. According to the SBA, this transition period will allow contractors to prepare for the change, while also avoiding confusion and inconsistency if contractors were given this choice for an indefinite period.
The final rule also adopted clarifications regarding the treatment of receipts and/or number of employees after the sale or acquisition of a segregable division versus the sale of a separate legal entity. SBA’s rules currently provide that the receipts and employees of a former affiliate that is sold prior to the date to determine size are excluded from the size calculation. To eliminate any ambiguity as to what constitutes a former affiliate, SBA added the following language to the former affiliate rule(s): “if a concern has sold a segregable division to another business concern during the applicable period of measurement or before the date on which it self-certified as small, the annual receipts [or employees] used in determining size status will continue to include the receipts of the division that was sold.” Although SBA was met with some resistance over this change, SBA explained that this clarification is consistent with its view that the sale or acquisition of a division merely represents “an addition or subtraction to the concern itself,” which is distinct from the sale or acquisition of a separate legal entity.
It is important to remember that although the wait for the final rule is over, the changes do not come into effect until January 6, 2020. In other words, the changes are not applicable to any date to determine size that comes before January 6. Therefore, contractors must wait just a little while longer before certifying as small based upon a calculation using a five-year averaging period for revenue-based size standards.