We recently reported that, on December 17, 2018, President Trump signed into law a bill that amends the Small Business Act to require that the size of a federal contractor be measured by an average of five years—rather than three years—of revenue for the purpose of determining small business program eligibility. Almost immediately after the bill became law, we started hearing from federal contractors—most of them ecstatic about the new law, but some of them less-than-thrilled.

Why are most federal contractors ecstatic about the new law?

Those in the former group generally are ecstatic because this new law may help them keep their small business status for a longer period of time, and thus keep open a lucrative line of business reserved for small companies.

For example, a company operating under NAICS code 236210 (Industrial Building Construction)—which has a size threshold of $36.5 million—with the following revenue from the preceding five years will qualify as a small business under the new law (whereas, they would not have qualified under the old law):

FISCAL YEAR 2014 2015 2016 2017 2018
REVENUE $25 million $30 million $35 million $37 million $40 million

In other words, this hypothetical company would have an average annual revenue under the old, three-year rule of $37.3 million—which would make them other-than-small—but would have an average annual revenue under the new five-year rule of $33.4 million—qualifying them as a small business.

Why are some federal contractors less than thrilled with the new law?

Those in the latter group generally are not thrilled because this new law will actually have the effect of making them other-than-small, and thus will close a lucrative line of business reserved for small companies.

For instance, a company operating under NAICS code 236210 (Industrial Building Construction)—which, again, has a size threshold of $36.5 million—with the following revenue from the preceding five years will not qualify as a small business under the new law (whereas, they would have qualified under the old law):

FISCAL YEAR 2014 2015 2016 2017 2018
REVENUE $47 million $45 million $40 million $35 million $25 million

In other words, this hypothetical company would have an average annual revenue under the old three-year rule of $33.3 million—which would make them small—but would have an average annual revenue under the new, five-year rule of $38.4 million—which would make them other-than-small.

Is this new law tenable?

In short, the new law may not be tenable in its current form. The new law clearly is well-intended and will be a significant benefit to many federal contractors, but based on the responses from federal contractors that we have seen thus far, it appears likely that there will be a push by some in the industry to make the lookback period the lower of either the three-year average or the five-year average.