On December 17, 2018, the Small Business Runway Extension Act of 2018 was signed into law, increasing the measurement of a small business' size status. Prior to this, a business' small business status was determined based on three years of average gross receipts. Once the business’s three-year average gross receipts exceeded a specific dollar threshold, that business was considered ready to enter the open marketplace.
In the eyes of the Small Business Administration (SBA), the determination of “small business” is based upon the gross receipts of a business and the NAICS codes under which that business sells products and services. Each NAICS codes under which a business operates has a dollar cap or threshold.
In the past, a business’ small business classification was based on the business’s average gross receipts over the preceding three years. However, under the Small Business Runway Extension Act of 2018, the business’s classification will be based on a business’s average gross receipts for the preceding five years. This two-year extension will give small businesses more time to prepare their business and its internal structure before entering the open marketspace.
For government contractors, the small business status often gives contractors an opportunity to bid on contracts set aside for small businesses or to win subcontracts with large primes with small business contracting requirements.
This new two-year extension gives small businesses more time to build their business infrastructure before having to compete in the general government contracting marketspace, which can be highly competitive.
The only drawback of the Small Business Runway Extension Act of 2018 is for contractors with declining revenue. For example, if a government contractor had two years of high growth followed by three years of declining revenue, that contractor may be pushed out of the small business space due to high revenues of their first two years of growth.
The SBA will need time to provide guidance on the new size classification process. Contractors are encouraged to keep an eye on the SBA for updated guidance. If you have any questions, contact us here or call 800.899.4623 for help.