The Runway Extension Act’s New Standard for Measuring Small Business Size Status Takes Effect
As detailed in our previous alert, when the Small Business Runway Extension Act of 2018 (the “Act”) became law in December 2018, the Small Business Administration (“SBA”) declared that the Act would not be effective until the SBA issued implementing regulations through the formal rule-making process. On June 24, 2019, the SBA finally issued a Proposed Rule to implement the Act, and on December 5, 2019, SBA issued a Final Rule announcing that the Act’s new formula for determining the size status of some companies would become effective as of January 6, 2020. Therefore, as of the date of this alert, the measurement period for determining whether a contractor qualifies as a small business concern under revenue-based size standards has been extended to an average of the most recently completed five fiscal years, replacing the most recent three fiscal-year period that the SBA previously considered for this purpose. The Act did not change the SBA’s historic methodology for calculating contractor qualification with employee-based size standards.
While most of the Final Rule is consistent with the Proposed Rule, there are some notable changes. First, the SBA has added a two-year transition period, ending on January 6, 2022, for implementing the new measurement period that allows companies the option of choosing whether to calculate their size based on the last three or five years of revenue during this period. This transition period should benefit some large businesses with declining revenues by allowing such contractors a faster transition to (or back to) small business status, while also allowing growing small business concerns the additional “runway” to remain “small” provided by the longer 5-year measurement period.
Second, the SBA has determined that the Final Rule will not apply to the Business Loan and Disaster Loan Programs, which will continue to calculate revenue based on the contractor’s three previous completed fiscal years. SBA will seek additional comment and input on longer averaging periods of eligibility for these programs. The Final Rule also clarifies that the former affiliate rule does not permit a small business to reduce its receipts for previous completed fiscal years to remove the revenue associated with a division that it no longer owns but which was not a separate legal entity.
While the Act is now in effect, as we previously noted, it will not be applied retroactively but rather will only impact size status certifications provided in connection with future solicitations and contract awards.
Read the full SBA notice here.