Understanding the legal application of the Runway Extension Act can save thousands in unnecessary litigation and potentially save millions in a federal small business contract.
Small business government contractors can be eligible to receive small business set-asides if they are “small” under the applicable Small Business Administration (SBA) rules and regulations. Meeting the requirements to be small under the SBA standards can give small businesses an important competitive edge in government contracting, because where the government agencies, including the various branches of the military, set aside a future contracting opportunity for small business, larger businesses are prevented by law from competing with small businesses to win the contract award.
Tip: You Can Find Government Contracting Opportunities Posted by the Government Contracting Officer on www.beta.SAM.gov
How do you figure out whether your business is small enough to potentially win a small business set-aside government contract award? The first step is usually simple: You can check to see which NAICS code was assigned to the procurement by the federal Contracting Officer (“CO”) who will conduct the competition for the procurement. Usually the set-aside information, and any applicable NAICS codes, are easily found on the first page of the solicitation. The solicitation is often publicly posted on the U.S. Government’s contracting opportunity website: beta.SAM.gov.
In the past, anyone could find government contracting opportunities published in the Commerce Business Daily, and later through online sources such as FedBizOps.gov. However, the government no longer uses those cites. As of the date of this article, the vast majority of government contracting opportunities are published on beta.SAM.gov.
Of course, meeting the size requirement will not be the only criterion your business must meet to actually win the award. You will need submit a proposal showing that your business is capable of performing the contract, and also meet other requirements in order to win. It is important to read the solicitation carefully, and follow the proposal instructions provided in the solicitation.
That said, with respect to meeting size requirements for a small business set-aside contract competition, it is very important to look for the applicable NAICS code, and figure out whether your firm is “small” or not under the applicable NAICS code.
What is a NAICS Code? A NAICS code is a number assigned to a type of industry. Almost every industry imaginable has one. “A NAICS (pronounced NAKES) Code is a classification within the North American Industry Classification System. The NAICS System was developed for use by Federal Statistical Agencies for the collection, analysis and publication of statistical data related to the US Economy.
It was adopted in 1997 to replace the Standard Industrial Classification (SIC) system in cooperation with the statistical agencies of Canada and Mexico … NAICS is a Self-Assigned System; no one assigns you a NAICS Code. What this means is a company selects the code that best depicts their primary business activity and then uses it when asked for their code.
If your Business Activities include more than one Unique Line of Business, you may want to use more than one NAICS Code.” See generally the NAICS Association website at NAICS.com.
Tip: Know Which NAICS Codes Apply to Your Business: Type of Work
You can first check to see which NAICS codes your business is able to perform. As mentioned above, almost every type of business in existence has been assigned a NAICS code. The U.S. Small Business Administration provides information about NAICS codes on its website, including information on obtaining the North American Industry Classification Manual-United States and also SBA publishes a list of NAICS codes once per year in the Federal Register. See 13 CFR §121.101. Also FAR 19.102 states that NAICS codes are available from the U.S. Census Bureau at https://www.census.gov/?eos/?www/?naics/.
For example, if you are a chicken farmer who sells eggs and various egg products, you might look for government contracting opportunities under the following NAICS codes:
112310 Eggs, chicken (table, hatching) production
311999 Eggs, processed, manufacturing
424440 Eggs merchant wholesalers
Each of these NAICS codes has a description, usually including examples of activities that fit the NAICS code, and activities that do not fit the NAICS code, as well as a size standard.
Once you have found some NAICS codes that describe types of work that your business either can do, or could easily start to do, you can move on to the next step: figure out whether your business is able to qualify as “small” under any of the NAICS codes you found.
A Potentially Tricky Question: Is Your Business Small Under a NAICs code?
Each NAICS code has its own size standard. For most NAICS codes size is a dollar threshold based on average annual receipts. A firm can figure out whether it is small or not by looking at its average annual receipts over a specified period of years. For other NAICS codes, for example, a firm’s size might be determined based on its number of employees. The NAICS codes are not all the same, a firm can be “small” under one NAICS code, but not small under a different but similar NAICs code.
Tip: Look at the solicitation for the specific procurement to find the NAICS code and Contracting Officer assigned size standard.
For a specific government contract, the U.S. government Contracting Officer is required to assign one NAICS code and corresponding size standard to each solicitation, contract, and task and delivery orders. The CO shall determine the appropriate NAICS code by classifying the product or service being acquired in the one industry that best describes the principal purpose of the supply or service being acquired. There specialized rules for assigning NAICS codes to multiple-award contracts. See FAR 19.102
If you are a subcontractor, there are situations where you may need to know if your firm is small under the NAICS code assigned by the prime contractor to the subcontract work. The prime contractor may need to know for purposes of complying with various SBA requirements. This NAICS code assigned by the prime contractor to the subcontract does not always have to be the same NAICS code in the prime’s contract with the government.
The Runway Extension Act Changed the Law, Effective on January 6, 2020.
Many NAICS codes call for determining a firm’s size by looking at its average annual receipts to see if the firm has average annual receipts over, or under a specified dollar threshold. The government sometimes updates NAICS codes, including the dollar thresholds.
Tip: Check for updates to the size standards, for NAICS codes your business uses.
Under the old rule, the 3 year rule, small businesses needed to average their annual receipts for the prior 3 years, according to a process described in the SBA regulations. The rule has changed.
Pub. Law No 115-324 §2, the Runway Extension Act of 2018, amended the Small Business Act by striking the words “3 years” and inserting the words “5 years.”
Thus, the 3-year rule changed to a 5-year rule after Pub. Law No 115-324 §2 the Runway Extension Act of 2018 was passed and became effective. When the law was first passed, there was some confusion, and litigation based on a variety of legal arguments, regarding whether the Runway Extension Act’s 5-year rule could be used right away, as soon as the law passed. It is now relatively settled law that the Runway Extension Act was not effective until after the SBA went through the entire rule-making process, and issued a final rule on this subject.
“SBA published a final rule implementing the small business runway extension act of 2018 by ‘lengthen[ing] the time in which the SBA measures size through revenue from the average of the past 3 years to the average of the past 5 years.’” This SBAissued its final rule effective January 6, 2020. Thus, January 6, 2020 became the earliest date that businesses are allowed to use the 5 year rule. However, the 3 year rule had not quite disappeared yet. See generally Size Appeal of Obsidian Solutions Group, LLC, SBA No. SIZ-6076 (October 29, 2020)
Tip: The 3 Year Rule Applies for Proposals Submitted to the Government Before January 6, 2020.
As a general rule (with certain exceptions not discussed here), if an offeror’s proposal, including price, was submitted to the government before January 6, 2020, the offeror must use the 3-year rule. If the offeror used the 5 year rule, the offeror continues to risk an SBA decision finding it too large to compete for the contract.
SBA’s commentary in the Federal Register makes it clear that the three- year calculation period continues to apply to “any offer submitted prior to the effective date of the final rule”. 84 Fed. Reg. 66561, 66568 (Dec. 5, 2019).
If the offer was submitted before January 6, 2020, it does not matter what date the Contracting Officer requests the size determination, or when the size determination is issued. If the CO requests the size determination after January 6, 2020, or the size determination will be issued after January 6, 2020, SBA will continue to apply the 3-year rule. Thus, if the business in question made the mistake of relying on the 5 year rule to support its representation that it is “small,” it could be found to be ineligible for award if it was too big under the 3-year rule – on the date of the offer. See generally, Size Appeal of BTAS, Inc., SBA SIZ-6063 (August 11, 2020).
The Runway Extension Act Transition Period: Two Years of Choosing Between the 3-Year Rule and the 5 Year Rule.
SBA realized that some small businesses could be disadvantaged by immediately utilizing a 5-year average starting as soon as the law was passed. Therefore, SBA decided it “would adopt a two-year transition period during which ‘a firm may choose between calculating receipts using a 3-year average or a 5-year average.’” Again, this became effective January 6, 2020. Thus, for a two year period running from January 6, 2020 to January 6, 2022, small businesses get to pick which rule benefits them the most, and use either the 3-year, or the 5-year rule, for calculating average annual receipts. After January 6, 2022, only the 5-year rule can be used. Id.
It is not too difficult to do the math to figure out which rule is most advantageous to your business, for purposes of maximizing your access to small business set-aside federal government contracts. Everything else equal, most firms would choose the rule giving them the lowest average annual receipts.
- If your small business has been expanding for the past five years, so that it makes more money each year, generally the 5-year rule would be better.
- If your business business is not doing very well, and for the past five years it has made less and less money each year, then your firm may get better results using the 3 year rule.
Again, the time period during which an offeror may choose between the rules ends on January 6, 2022.
If your small business must rely on the old 3-year rule to support its “small” size status, it may be wise to ensure that your small business’ proposals (including price) for small business set aside contracts are submitted to the Government before January 6, 2022, if at all possible.
NAICS code compliance is not enough to win a small business set-aside contract.
It is probably stating the obvious, for most experienced government contractors, to mention that there is more to winning a government contract than meeting the NAICs code type of business requirements and being “small” under the applicable size standard. In general, your firm will also have to submit a proposal that responds to the government’s requirements as stated in the solicitation, and meet other requirements.
Also, unless it is a sole source procurement, there will very likely be other small business offerors submitting proposals and competing for the contract — your firm’s proposal will not be the only proposal considered by the government. To win, your proposal will have to beat the competition. The good news is, for small business set-asides, you generally do not have to compete against corporate giants, the competition will be limited to small businesses only.
Tip: Have A “Stay Small” Strategy In Place Long Before January 6, 2022.
Failing to plan can be planning to fail.* It can pay to see the January 6, 2022 deadline coming, and do some advance planning. If your firm’s business model includes small business set-aside U.S. Government Contracting, be ready to make the change to the 3-year rule.
*For attribution, the quotation “Failing to plan is planning to fail,” ref. Quoteinvestigator.
The transition period during which your firm may use the 3-year rule ends on January 6, 2022. Know which NAICS codes are the most promising for your firm, and take steps to ensure that your firm will remain “small” for those NAICS codes on January 6, 2022 and into the future. There are various situations where your firm may need to represent its small business status as “Small,” under SBA’s rules. Make sure your accounting team, and your bid and proposal team, are ready and prepared to comply with the 5-Year Rule to calculate your average annual receipts effective January 6, 2022.
There are steps your small business can take to remain “small” under the NAICS codes that bring small-business set-aside revenue to your firm.
Get help in mapping out a strategy to protect your future in small business set-aside federal government contracting. Call our SBA size standards and Runway Extension Act lawyers at 1-866-5518 for a FREE Initial Consultation.