Major Change in Store for Small Business Size Calculation

January 21, 2019

Historically, contractors were required to use the average of their last three completed fiscal years to determine if they qualify as a small business, under either the “annual revenue” or “number of employees” thresholds. Per the Small Business Runway Extension Act of 2018 (the Act), which was signed by President Trump on December 17, 2018, the period of measurement has been increased to five years. The extension will allow rapidly-growing contractors to qualify as small businesses for an additional year or two, because the calculation will now include data from four and five years ago, when the revenue and/or number of employees was presumably lower.

For the following example, assume a business has a size standard of $28 million and five years of revenue:

FY 14 FY 15 FY 16 FY 17 FY 18
$5M $10M $20M $30M $40M

Under the three-year period, the contractor would not qualify as a small business in 2019. Now, under the new five-year period, this contractor will qualify as a small business in 2019. Though the majority of contractors will enjoy at least another year of small business status, contractors who had a spike in revenue four or five years ago could lose their small business status because of the new rule.

Now that the law has been enacted, the Small Business Administration (SBA) will have to promulgate regulations, as required by the Act. The method and time frame for implementation of the new five-year period will be addressed in the SBA regulations.

Stay tuned for updates and more details when the SBA regulations are issued. For questions, contact Tom Marcinko at 301.231.6200.