The GAO Weighs in on SBA's New Five Year Annual Receipts Average

by Susan Lavington

  • Government Contracting

Contractors (and officials) across the country have experienced some confusion about the implementation of the recently enacted Small Business Runway Extension Act of 2018. If you’re unfamiliar with the Act, Congress has amended the Small Business Act to modify the method for prescribing size standards for business concerns – what used to be a three-year standard has now become a five-year standard. Thus, the implementation of this Act would extend the measurement period of the SBA’s calculation of average annual receipts for purposes of size standards from three years to five.

When Should Businesses Start Calculating With a Five Year Average?

Right off the bat, the SBA and Congress did not agree with when this Act should take effect – leaving confused contractors in their wakes.

While the President signed the law on December 17, 2018, shortly thereafter, the SBA opined in an Information Notice that the amended law was not effective immediately. Specifically, the SBA’s Notice stated that “[t]he change made by the Runway Extension Act is not presently effective and is therefore not applicable to present contracts, offers, or bids until implemented through the standard rulemaking process. . . Until SBA changes its regulations, businesses still must report their receipts based on a three-year average.” The SBA has continued to assert that the Act was not presently effective stating in April 2019 that “Businesses must continue to report their annual receipts based on a 3-year average until SBA amends its regulations.”

However, Congress fired back in May 2019 in a House Committee on Small Business Press Release. The Press release states: “Upon the Runway Act’s passage into law on December 17, 2018, the Small Business Administration has postponed its implementation, creating confusion and challenges for small businesses competing for federal contracts.”

The GAO Steps In To the Debate

On August 16, 2019, the GAO issued a bid protest decision in the matter of TechAnax, LLC; Rigil Corporation. The protesters argued that a GSA RFP did not comply with the Runway Extension Act, specifically arguing that the Act applies to all size standards issued by SBA, that the Act took effect immediately after enactment, and thus, the five-year average should be used. Although the GAO noted that its review was limited, it ultimately denied the protest, finding no basis to conclude that SBA and GSA’s actions in delaying implementation violated the Act. Specifically, the GAO noted that “[e]ven assuming the Runway Extension Act took effect on the date of its enactment, however, we conclude that the act did not automatically amend all existing size standards and SBA regulations.”

What’s Next?

The House Committee’s May Press Release referred to a bill titled: “Clarifying the Small Business Runway Extension Act.” That bill confirms that, contrary to the SBA’s interpretation, the “Small Business Runway Extension Act of 2018 has been effective since the date it was signed into law, on December 17, 2018.” The bill would also require the Administrator of the SBA to issue a final rule implementing the original Act no later than December 17, 2019. This bill passed in the House on July 15, 2019 and has now been referred to the Senate’s Committee on Small Business and Entrepreneurship.

The SBA has again taking a dueling approach and, on June 24, 2019, promulgated a proposed rule for implementation of the Act. However, the proposed rule has no effective date and proposes only a modest implementation: “Specifically, consistent with a recent amendment to the Small Business Act, SBA proposes to change its regulations on the calculation of annual average receipts for all receipts-based SBA size standards and other agencies’ proposed size standards for service-industry firms from a 3-year averaging period to a five-year averaging period.”