On December 17, 2018, the Small Business Runway Extension Act became law. As we’ve previously written, this Act had a single purpose: to extend the measurement period of the SBA’s calculation of average annual receipts, from three years to five.
We opined that the Act became effective with the stroke of the President’s pen. Just a few days ago, however, the SBA disagreed—according to the SBA, the 5-year calculation period will not become effective until its regulations are revised.
The SBA’s December 21, 2018 Information Notice (which, due to the partial government shutdown, hasn’t yet been posted to its website) notes the confusion caused by the Runway Extension Act:
SBA is receiving inquiries about whether the Runway Extension Act is effective immediately—that is, whether businesses can report their size today based on average annual receipts over five years instead of annual average receipts over three years.
Information Notice No. 6000-180022 observes that the “Runway Extension Act does not include an effective date,” and therefore the SBA concludes that the Act “is not presently effective and is therefore not applicable to present contracts, offers, or bids until implemented through the standard rulemaking process.” And though the SBA says that it is drafting regulations to implement the change, there’s no indication of when those revisions might be completed and implemented.
Candidly, I don’t believe the SBA’s decision to defer the effectiveness of the 5-year calculation period has much merit. A long-standing principle of statutory interpretation holds that a statute is presumed to be effective immediately unless it specifies a different effective date. E.g., Matthews v. Zane, 20 U.S. 164, 179 (1822). Again, the SBA noted that the Act doesn’t include an effective date. So how did it reach its decision to give effect to the Act at some future date?
Unfortunately, the Information Notice doesn’t really explain the SBA’s rationale. It comes closest to offering a justification when it notes that the Small Business Act “requires new size standards be approved by the Administrator through a rulemaking process.” But that’s not the effect of the Act, which instead has to do with the time-period for calculating receipts. I don’t think, therefore, that this explanation is sufficient—under clear principles of statutory interpretation, the Act is effective immediately. And because a statute trumps an inconsistent regulation, e.g., Scofield v. Lewis, 251 F.2d 128, 132 (5th Cir. 1958), the 5-year calculation period should be considered to apply.
None of this is meant to fault the SBA. Congress really stuck it to the SBA when it passed the Act without including any time for the SBA to revise its regulations. In fact, I’ll give the SBA some credit: it is dealing with the confusion caused by the Act the best it can by trying to maintain the status quo until its regulations catch up. I’m just not sure, however, that its chosen path is legally correct.
Enough of the legal discussion. What does this mean for small business federal contractors? Well, as of now, the SBA has said that the 3-year calculation period still applies. If that best suits your business, you might consider rolling with it.
But if a 5-year calculation might instead benefit your business, you could consider making that case; you might be able to appeal an adverse decision to SBA’s Office of Hearings and Appeals, which might be of the mindset that the 5-year calculation is, in fact, immediately effective. An adverse OHA ruling could be taken to the Court of Federal Claims.
Though the SBA has tried to eliminate the confusion caused by the abrupt effectiveness of the Runway Extension Act, I’m not sure it has done so convincingly.
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