Happy New Year to mid-size government contractors! SBA’s determination of small business status under receipts-based size standards is transitioning from a three-year to a five-year lookback period starting today. The change is the result of a final rule that SBA issued on December 5, 2019. The rule is intended to allow mid-size businesses to regain or keep their small business status longer. The expectation is that this will increase small business contracting dollars and set-asides. A breakdown of the rule is below.
The five-year versus three-year lookback
This is a simple but impactful change. Under the old rule, small business status under receipts-based size standards was calculated using a three-year average revenue calculation (i.e., total receipts from the last three fiscal years divided by three). The short look-back period resulted in contractors losing their small business status relatively quickly. Rapid or abnormal revenue growth could result in a contractor losing its small business status before it was actually ready to compete with larger businesses in an unrestricted marketplace.
The Small Business Runway Extension Act of 2018 addressed this problem for service-industry small businesses. It extended the lookback period from three to five years but it left the three-year lookback in place for non-service industry concerns. (See 15 U.S.C.
§ 632(a)(2)(C)(ii)(III).) To promote consistency and avoid confusion, SBA’s new final rule makes the five-year lookback applicable to all industries subject to a receipts-based size standard. Under the new rule, a contractor can certify itself as a small business if the five-year average revenue calculation (i.e., total receipts from the last five fiscal years divided by five) is below the applicable size standard.
According to the SBA, there are several benefits to this change:
- First, companies that are approaching (or have recently exceeded) their applicable receipts-based size standards may now be able to regain small business status or keep that status longer. SBA estimates that the change will positively impact more than 70,000 businesses.
- Second, SBA expects the larger, more stable pool of small businesses to cause an increase in the number of set-aside opportunities, resulting in lower overall prices.
- Third, large businesses seeking to meet their small business subcontracting requirements will have a larger pool of small business subcontractors from which to draw.
Two-year transition period
SBA believes that the change to a five-year lookback will benefit all small businesses in the long run. But the change does not necessarily benefit all small and mid-size businesses in the short term. Businesses that are still small under the three-year lookback will now face greater competition from companies that would previously have been deemed other than small. Similarly, a dramatic switch to a five-year lookback would not help a business that is seeing declining revenues. The declining revenues might make it small under a three-year lookback, but other than small under a five-year lookback.
To mitigate these impacts, SBA has implemented a two-year transition period. From today until January 6, 2022, businesses may choose between either the three-year or five-year lookback periods. This allows both mid-size businesses and those with declining revenues to choose the period that suits them best (i.e., the one that gives them small business status).
The transition period’s sunset is a hard date. Even if a business qualifies as small under a three-year lookback, if it is asked to re-certify its size after January 6, 2022, it will have to do so using a five-year lookback. Similarly, today is the official start date for the five-year lookback period. The three-year lookback still applies to any offers that were submitted before January 6, 2020. If SBA receives a size determination request that relates to an offer or certification that was submitted before January 6, 2020, it will still use the three-year lookback for that size determination.
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