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  • Writer's pictureJoshua Duvall

GAO, SBA OHA: Contractors Should Use Three-Year Average to Calculate Size

In the last month, both the Government Accountability Office (“GAO”) and the SBA Office of Hearings and Appeals (“SBA OHA”) have separately ruled that, for the purpose of calculating size under receipts-based size standards, contractors must continue to use a three-year averaging period, rather than a five-year averaging period, until the SBA concludes its rulemaking.

By way of background, on December 17, 2018, the president signed the Small Business Runway Extension Act, Public Law 115-324, which amended the Small Business Act by changing the averaging period for receipts-based size standards from three to five years. Because the Runway Extension Act did not include an effective date, many in the government contracting industry opined that it took immediate effect. On the other hand, the SBA has taken the position that it must go through its rulemaking process in order for the five-year averaging period to take effect. [1]

Given these differing views on when the five-year averaging period takes effect, some contractors looked to GAO and SBA OHA for clarity. After all, the ability to compete for set-aside contracts is predicated on whether a business is a "small business concern" under SBA's regulations. [2]

In the decisions below, both GAO and SBA OHA deferred to SBA’s interpretation of the Runway Extension Act, which means that, for now, the five-year averaging period will not take effect until the SBA issues a final rule implementing the change.

Unless a Federal court says otherwise, contractors should continue to use the three-year averaging period to calculate their size under receipts-based size standards.

  • “As discussed above, we grant deference to SBA’s interpretation of the Small Business Act, particularly with regard to its role in the establishment, amendment, and interpretation of small business size standards. (citation omitted). We therefore defer to SBA’s interpretation of the Runway Extension Act as requiring rulemaking, by either SBA or an agency promulgating its own size standards, to implement the revision of the 3-year average to a 5-year average, and the prospective effect of that revision.”

  • "Accordingly, insofar as the Runway Extension Act can be understood as lengthening the time period used to calculate the size of individual businesses, such a change would have occurred in the context of a revision to the size standard methodology, and therefore could be implemented only through notice-and-comment rulemaking and with approval of the SBA Administrator. . . . Consequently, SBA could reasonably conclude, as stated in SBA Information Notice No. 6000-180022, that the Runway Extension Act is not immediately effective and instead must, based on the entirety of section 3(a)(2)(C) of the Small Business Act, be implemented via notice-and-comment rulemaking."

. . .

[1] See SBA Information Notice No. 6000-180022 (“[u]ntil SBA changes its regulations, businesses still must report their receipts based on a three-year average”).

[2] See 13 C.F.R. § 121.101(a); see also 13 C.F.R. § 121.104(c).

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