Say What? SBA Says the Runway Extension Act Doesn’t Apply to SBA

The Small Business Runway Extension Act continues to be a hot topic of conversation among small businesses. For good reason: it revised the receipts calculation period for revenue-based size standards from three years to five.  

In late 2018, the SBA opined that the Runway Extension Act wasn’t applicable because the SBA had not yet updated its regulations. Following industry pushback, the SBA’s position seems to have evolved. During a panel discussion at this year’s National 8(a) Conference, the SBA said that the Runway Extension Act applies to every agency that might adopt its own size standards . . . just not the SBA itself.

This new justification is a bit of a head-scratcher. And I still don’t think the SBA has it right.

Let’s work through the SBA’s position together.

Whenever the applicability of a statute is disputed, the obvious starting place is the statutory language itself. The Runway Extension Act is very brief. It states, in full:

Section 3(a)(2)(C)(ii)(II) of the Small Business Act (15 U.S.C. 632(a)(2)(C)(ii)(II)) is amended by striking “3 years” and inserting “5 years”.

As revised by the Runway Extension Act, the Small Business Act now reads, in pertinent part:

(a) Small Business Concerns.

            ***

(2) Establishment of size standards.

                        ***

                        (c) Requirements.—Unless specifically authorized by statute, no Federal department or agency may prescribe a size standard for categorizing a business concern as a small business concern, unless such size standard—

                        (ii)        provides for determining—

                        (II)       the size of a business concern providing services on the basis of the concern’s annual average gross receipts of the business concern over a period of not less than 5 years.

See 15 U.S.C. § 632(a)(2)(C).

In other words, the Small Business Act now says that “no Federal agency or department” can issue a receipts-based size standard unless that standard calculates the small business’s size over a five-year period.

This language seems pretty clear to me. But at the 2019 National 8(a) Conference, the SBA said that it doesn’t believe the Runway Extension Act applies to it; instead, the SBA says that Section 632(a)(2)(C) applies to every other agency, so the SBA isn’t obligated to update its own receipts-based calculation period. Had Congress simply amended the correct section of the Small Business Act, the SBA said it would’ve given the Runway Extension Act immediate effect.

Contrary to this assertion, Section 632(a)(2)(C) doesn’t exclude the SBA. The provision applies to any federal agency or department—which the SBA surely is. The Small Business Act broadly defines a “federal agency” to include “each authority of the Government of the United States, whether or not it is within or subject to review by another agency” (subject to certain specific—and inapplicable—exceptions). 15 U.S.C. § 632(b) (incorporating the definition of agency set forth at 5 U.S.C. § 551(1)). Under the plain language of the Small Business Act, as revised by the Runway Extension Act, the new five-year calculation period applies to the SBA.

Earlier in 2018, in fact, the SBA acknowledged that it was subject to Section 632(a)(2)(C). Citing that provision, the SBA said that “Congress directs SBA to establish size standards for manufacturing concerns using number of employees and service concerns using average annual receipts.” Coming just a few months after the SBA acknowledged the applicability of Section 632(a)(2)(C), I’m not sure how it can now say the opposite.

Passing the Runway Extension Act, moreover, Congress made clear that it applies to the SBA. The stated purpose of the statute is to “help advanced-small contractors successfully navigate the middle market as the reach the upper limits of their small size standard,” by “lengthen[ing] the time in which the Small Business Administration (SBA) measures size through revenue, from the average of the past 3 years to the average of the past 5 years.” (Emphasis added). This purpose is important—according to the Supreme Court, ambiguous statutes should be interpreted “not in a vacuum, but with reference to the statutory context, structure, history, and purpose.” Abramski v. United States, 573 U.S. 169, 179 (2014) (citation omitted).

As I read it, the Runway Extension Act requires the SBA to update the receipts-based calculation period, from three years to five. Congress not only made this purpose clear, but the SBA has itself acknowledged that it is subject to the revised section of the Small Business Act. With respect to the SBA, I don’t think this new justification against giving immediate effect to the five-year receipts calculation period is any more convincing than its first explanation. To me, the Runway Extension Act requires the SBA to immediately implement the five-year receipts calculation period.

I understand the difficult position the SBA has been placed in by the Runway Extension Act. One would think that, before it mandated a change in the small business calculation period, Congress would’ve consulted the SBA. I’m not sure that happened to a meaningful degree here—had it, Congress probably would have given the SBA time to implement updated regulations. Absent this meaningful consultation, Congress mandated an immediate change without fully understanding how disruptive it would be.

Let’s also give the SBA credit for trying to explain its position to the industry. At the National 8(a) Conference, in fact, both Robb Wong (SBA’s Associate Administrator, Office of Government Contracting and Business Development) and John Klein (SBA’s Associate General Counsel for Procurement Law) discussed the issue—and a myriad of others—with small business contractors in great detail. And though I might disagree with the SBA’s conclusions about the implementation of the Runway Extension Act (as it no doubt disagrees with mine), I’m nonetheless impressed with their willingness to engage forthrightly on the issues impacting small businesses.

Faced with uncertainty about its size regulations, it’s not unreasonable for the SBA to maintain the existing three-year calculation period until it can revise its regulations to reflect the new five-year period. But whether a policy is reasonable doesn’t necessarily mean it’s legally sound. Here, I think the legally sound policy would be to give the five-year calculation period immediate effect.

Where does this leave small business contractors? Unfortunately, I think they’re in the same position they were before: dealing with the uncertainty of whether their size is calculated based on a three or five year period of measurement.

If you have questions about the applicability of the Runway Extension Act or its effect on your business, please give me a call.