SBA Proposed Rule Would Change Limitations on Subcontracting

Limitations on Subcontracting: SBA Proposes Sweeping Changes

By Steven Koprince   Posted to Smallgovcon.com  on January 5, 2014

The limitations on subcontracting would undergo sweeping changes under a recent SBA proposal.

On December 29, the SBA issued a proposed rule to enact the changes implemented by Congress in the National Defense Authorization Act of 2013–including a thorough re-write of the way that compliance with the subcontracting limits is calculated and enforced.

As longtime SmallGovCon readers may recall, the 2013 NDAA contained two major changes in the subcontracting limits for set-aside contracts.

First, for service and supply contracts, the 2013 NDAA changed how compliance is calculated.  For services contracts, the NDAA replaced the “personnel costs” formula with a formula based on the amount paid to the prime contractor.  Similarly, for supply contracts, the 2013 NDAA replaced the “manufacturing costs” formula with one based on the amount paid to the prime contractor (less materials costs).

Second, the 2013 NDAA allowed small businesses to meet their own performance requirements by subcontracting to “similarly situated entities.”  In other words, for a small business set-aside, a company could achieve its own performance requirements, in part, by subcontracting to other small businesses.

The 2013 NDAA was signed into law in January 2013 and added to the Small Business Act.  For the past two years, confusion has reigned as to whether the “new” subcontracting limitations contained in the Small Business Act are presently effective, or whether those changes will only affect contractors once regulations are adopted implementing the statutory provisions.  The SBA’s proposed rule hopefully signals that an end to this confusion is coming (although the FAR Council has yet to act on an amendment to FAR 52.219-14).

Key Regulatory Changes: Program-by-Program

The SBA’s proposed rule includes the following major changes to the limitations on subcontracting:

Small Business Set-Aside Contracts

The proposed rule rewrites 13 C.F.R. § 125.6, which governs the limitations of subcontracting for small business set-aside contracts.  Key revisions include:

  • For small business set-aside contracts for services, “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”
  • For small business set-aside contracts for supplies (other than from a nonmanufacturer), “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”

The proposed rule confirms that “[w]hether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement.”

8(a) Set-Aside Contracts

The proposed rule rewrites 13 C.F.R. § 124.510 and 13 C.F.R. § 125.6, which govern the limitations of subcontracting for 8(a) set-aside contracts.  Key revisions include:

  • For IDIQ contracts, an 8(a) prime contractor may satisfy the requirement to perform the appropriate amount of work by subcontracting to similarly situated entities.
  • For 8(a) set-aside contracts for services, “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”
  • For 8(a) set-aside contracts for supplies (other than from a nonmanufacturer), “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”

The proposed rule confirms that “[w]hether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement.”

SDVOSB Set-Aside Contracts

The proposed rule rewrites 13 C.F.R. § 125.15 and 13 C.F.R. § 125.6, which govern the limitations of subcontracting for SDVOSB set-aside contracts.  Key revisions include:

  • For SDVOSB set-aside contracts for services, “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”
  • For SDVOSB set-aside contracts for supplies (other than from a nonmanufacturer), “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”

The proposed rule confirms that “[w]hether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement.”

 HUBZone Set-Aside Contracts

The proposed rule rewrites 13 C.F.R. § 126.700 and 13 C.F.R. § 125.6, which govern the limitations of subcontracting for HUBZone set-aside contracts.  Key revisions include:

  • For HUBZone set-aside contracts for services, “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”
  • For HUBZone set-aside contracts for supplies (other than from a nonmanufacturer), “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”
  • The regulation deletes the unpopular requirement under 13 C.F.R. § 126.700(b) that requires HUBZone companies to spend at least 50% of the cost of the contract incurred for personnel on all HUBZone set-asides, including set-asides for general and specialty trade construction.  Thus, under the proposed rule, HUBZone construction firms would be able to take advantage of the “ordinary” 15% and 25% limits for such contracts without the added worry of complying with the HUBZone-specific 50% requirement.

The proposed rule confirms that “[w]hether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement.”

WOSB Set-Aside Contracts

The proposed rule rewrites 13 C.F.R. § 127.504 and 13 C.F.R. § 125.6, which govern the limitations of subcontracting for WOSB and EDWOSB set-aside contracts.  Key revisions include:

  • For WOSB/EDWOSB set-aside contracts for services, “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.
  • For WOSB/EDWOSB set-aside contracts for supplies (other than from a nonmanufacturer), “no more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated.”

The proposed rule confirms that “[w]hether particular specific entities perform the forecasted amount of work is not material, as long as the similarly situated entities collectively meet the performance of work requirement.”

Definitions and Interpretation

The SBA’s proposed rule includes a number of important definitions, as well as insights as to how the SBA will interpret the new regulations.  Among the key changes:

“Similarly Situated Entity” Definition

As seen in the program-by-program analysis above, the concept of a “similarly situated entity” is critical to the understanding and enforcement of the new rules.  The proposed rule provides that “a similarly situated entity subcontractor is a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.”

Simplified Acquisitions

The proposed rule would exempt small business set-aside contracts between $3,000 and $150,000 from the limitations on subcontracting requirements.  In its rule, the SBA notes that the FAR only requires the use of the limitations on subcontracting clause, FAR 52.219-14, in acquisitions above the simplified acquisition threshold.  Thus, the SBA states, its proposed rule “would merely adopt what the FAR has done.”  However, the proposed rule makes clear that this exception applies only to small business set asides.  Under the proposed rule, “[t]he limitation on subcontracting requirements would continue to apply to all 8(a), HUBZone, SDVO, and WOSB/EDWOSB set aside contract awards regardless of value, including but not limited to contracts with values between $3,000 and $150,000.”

Which Limitation Applies?

When a solicitation combines supplies and services, the proposed rule provides that “the contracting officer’s selection of the NAICS code is determinative as to which limitation on subcontracting and performance requirement applies.”  The rule states that “in no case” will both the service and supply limits apply to the same contract, and further states that the applicable limitation “shall apply only to that portion of the contract award amount.”

Read the full article for more information on Certification and Enforcement, Additional Matters, and Public Comment and Next Steps at:  http://smallgovcon.com/service-disabled-veteran-owned-small-businesses/limitations-on-subcontracting-sba-proposes-sweeping-changes/

 


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