Small business concerns will be pleased at the recent news that the Small Business Administration (“SBA”) recently made it easier for a small business to remain “small.” The SBA issued a final rule effective January 6, 2020, that changed the time period for determining whether a firm is a small business from the current three-year average annual receipts to a five-year averaging period. 

To make it easier for a small business to remain a small business, the final rule includes a two-year transition period until January 6, 2022. For those contractors who are worried they would lose their size status if they were to switch immediately to the five-year calculation, this transition period will come as good news. During this transition period, small businesses can choose between using the three-year or the five-year average period of annual receipts when determining their size status. This transition period was included to prevent harming some businesses who would lose their size status as a result of the new calculation method. After the transition period, small businesses with five or more years in business will use the five-year average, while those with less than five years in business will use however many years they have been in business.

The final rule ends the confusion among small businesses as to how their size status would be calculated following the passage of the Runway Extension Act, on December 17, 2018. We recently summarized a decision that highlighted this confusion, where GAO denied a protest regarding the calculation of a small business concern’s size status and deferred to SBA’s interpretation of the Small Business Act, finding that the three-year average was the proper calculation until the SBA issued a final rule implementing the Act. 

The issuance of the final rule provides clarity for small businesses as to how their size will be calculated. It allows mid-sized businesses to regain small business status, while also providing small businesses with more time to mature and implement the necessary infrastructure to remain competitive once they graduate to the open market. The transition period permits some small businesses to avoid any negative impacts for two years and prepare for any loss in status after the two-year transition period is over. Overall, the final rule will allow small and mid-sized businesses who reclaim small business status to continue their growth and become better suited to compete against large contractors in the open market. 

Now that the SBA has issued the final rule, small businesses must determine whether to use the three-year or five-year calculation periods for annual receipts before the final rule becomes effective. 

Berenzweig Leonard  is teaming up with  Red Team Consulting  for a monthly newsletter featuring reports on recent contract decisions, recent upcoming contracts, key protest decisions, events, and more. This post was published in the December 2019 newsletter. To sign up for our govcon newsletters, please email [email protected].

Daniel Alvarado is an Associate in the Government Contracts practice at Berenzweig Leonard. Daniel can be reached [email protected]