GAO Defers to SBA in Debate about Small Business Runway Extension Act Application

On August 16, 2019, the GAO issued its decision relating to the protest of TechAnax, LLC.  In doing so, it answered an ongoing debate concerning the application of the Small Business Runway Extension Act of 2018, which required a company’s size status to be calculated on a 5-year average basis.   The GAO’s decision in TechAnax makes it clear that – at least as far as the GAO is concerned – an agency may continue to measure a company’s size on a 3-year average basis until the SBA finalizes the rules implementing the Act.

The Small Business Runway Extension Act was signed into law on December 17, 2018.  It amends the Small Business Act, to modify the method for measuring a company’s size.  As federal contractors know, size calculations are critically important to determining whether a business is eligible for participation in the federal small business programs, and for award of set-aside contracts.  The Act mandates that a company’s size will no longer be calculated on the basis of a 3-year average; instead, size will be calculated on the basis of a 5-year average.  The purpose of this change was to allow small businesses who experience growth to remain “small” a little longer.

Contractor reactions to this change were mixed.  The SBA itself came out as an opponent of the change.  Moreover, the SBA took the position that the 5-year calculation period would not go into effect until the SBA changed its regulations to implement the change.  At the same time, months went by and the SBA appeared to make no move towards actually changing the regulation.

In June of 2019, a hearing was held before the U.S. Senate Committee on Small Business and Entrepreneurship.  Senator Rubio demanded that the SBA explain its delay in implementing the Act.   Shortly thereafter, the SBA issued a proposed rule, implementing the Act, which started the ball rolling towards implementation.  However, the rule change was not yet final.  As a result, contractors have remained confused about how they should calculate their size in the interim until the rule is finalized, and the regulations changed.  Many legal experts and government contracts industry leaders maintained that the change became effective on December 17, 2018, when the Act was passed.  This conclusion was based on a long-accepted principal of statutory construction that, absent a clear direction by Congress to the contrary, a law takes effect on the date of its enactment.  The SBA, however, has maintained that the 3-year standard applies until the rule is finalized.

In TechAnax, the GAO adopted the SBA’s position.  The protestor challenged the terms contained in the GSA’s Request for Proposal No. GS00Q-13-DR-0002 (“the RFP”), which related to IDIQ OASIS contracts in small business pools 1, 3 and 4.  The protestor alleged that the RFP did not comply with the Runway Extension Act, in that it indicated a 3-year rather than 5-year period would be used to determine an offeror’s size.  In addressing this challenge, the GAO acknowledged the long standing rule concerning effective dates of statutory changes.  Nonetheless, it reasoned that “Even assuming the Runway Extension Act took effect on the date of its enactment . . . we conclude that the act did not automatically amend all existing size standards and SBA regulations.  Rather, as the SBA reasonably explains, the Small Business Act requires the promulgation of regulations to give effect to the Runway Extension Act.”    The GAO went on to state that “We find no basis to conclude that the SBA’s interpretation of the Small Business Act or its own regulations are unreasonable in such a manner that would require procuring agencies such as GSA to issue solicitations that implement a 5-year average for calculating a firm’s annual revenue in the absence of rulemaking.”

So what does this mean for government contractors?  It means that until the SBA issues a final rule amending its own regulations to implement the changes in the Runway Extension Act, the safest course is to calculate your size using the old 3-year average methodology.  Hopefully, the rule will be finalized soon, changing the calculation period to 5 years.  If you have questions about how to calculate your size, or about your small business eligibility in general, we are here to help.

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Michael A. Richard

Associate

Michael is an attorney in Obermayer’s Government Contracting Department, where he excels at getting clients to the settlement table. Michael’s tenacity is truly a force to be reckoned with. Over the past...

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