13 CFR 125.6 Understanding Rules of Prime Contractor’s Limitations on Subcontracting

Failure to Follow 13 CFR 125.6 Can Cause You to Lose Your Contract in a Bid Protest or Expose You to Criminal Liability in a Procurement Fraud Case.

Theodore P. Watson, Esq Given the new SBA small business set aside subcontracting rules, small businesses must pay special attention to the specific requirements of 13 CFR 125.6 and limitation on subcontracting requirements under FAR 52.219-14. Understanding the importance of compliance or the legal consequences can change the way small businesses and larger defense contractors view their bidding approaches.

Companies are now being charged with procurement fraud and other criminal charges because there are violations. If your award is challenged in a bid protest and for some reason, you have failed to comply with the FAR requirements, then you also stand the chance of losing the contract.

• Does Your Proposal Minimize the Risk of the CO deciding that you don’t meet the requirements?
• Can you successfully challenge the CO in making a decision that your proposal is technically unacceptable?
• Avoid the mistake of using limitation on subcontracting as a basis for filing a small business size protest with the SBA.

What is the Prime Contractor’s Limitations on Subcontracting under FAR 52.219-14 ?

The limitation on subcontracting clause suggests that by you submitting “an offer and execution of a contract, you agree that in performance of the contract in the case of a government contract for services, [a]t least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of your company. See 48 CFR 52.219-14(c)(1) and 13 CFR 125.6.

The limitations on subcontracting for small business rules require the prime contractor to only pass down a set amount of the contract award amount to its subcontractor. Under the old rules, the prime contractor has to track the amount of labor hours it performed. The new subcontracting rules make it easier for small businesses to pass on work to other small businesses (similarly situated) and get credit for the work passed on.  The rule is very important to avoid criminal liability and government contract fraud allegations.

Why is the Rule Limitation on Subcontracting Rules So Important?

As mentioned above, not only does the law require prime contractors to perform a specified amount of the contract, but there are also cases where joint ventures and individual prime contractors have faced criminal charges for violating the limitation on subcontracting rules. In one example, The government alleged that one party to a joint venture, Sunrise, performed nearly all of the work on the joint venture project and received nearly all of the profits, in violation of the government contract and procurement law. 

In another case, the majority owner and former Chief Executive Officer of Virginia-based defense contractor ADS, Inc., agreed to pay the United States $20 million to settle allegations that he violated the False Claims Act by fraudulently obtaining federal set-aside contracts reserved for small businesses that his company was ineligible to receive.

How Do You Minimize The Chance of Being Challenged in a Bid Protest?

Your proposal has to be readily apparent that you do meet the subcontracting requirement. If you submit a government bid response for projects set aside for small businesses, and it seems to fail to meet the limitation on subcontracting clause, you can be up for a challenge in a bid protest.  The reality is that if someone is challenging your compliance with the clause, then it may be a little difficult for them to prove and better for you as the intervenor in a bid protest case.  

• Articulate in your proposal what percentage of work your company is doing for each item in the Statement of Work

If, on the other hand, the government gives you a low score because it thinks that it is quite obvious that you are not complying with small business set aside subcontracting rules, then you may be in line for an uphill fight if it is ‘readily apparent’ to the agency that your proposal fails to show that you can comply with the requirement.  Of course, the agency has to adequately document its file to prevail in a bid protest.  For a better understanding as to the discretion given the government under 13 CFR 125.6 see Caddell Constr. Co. v. United States, 129 Fed. Cl. 383, 404 (2016) (quoting Centech Group, Inc. v. United States, 554 F.3d 1029, 1038-40 (Fed. Cir. 2009)) (emphasis provided in Centech).

How Can You Minimize Mistakes and Not Get Your Bid Thrown Out for Violating Small Business Set Aside Subcontracting Rules?

The first approach would be to adequately plan out the numbers in your bid proposal. This means that when addressing the Statement of Work (SOW) you should articulate the section of the SOW and what percentage of work your company would be doing versus the other company/subcontractor.

• Never leave it up to the agency to speculate.
• Cross-reference the SOW requirements and map out the respective work share.

The next item to look for is whether your subcontractor is a similarly situated small business. Meeting the definition can help your obligations under 13 CFR 125.6 and FAR 52.219-14. Your attorney should be able to assist you with this important issue.

Tips for Subcontracting Limitations for SDVOSB, HUBZone and WOSB

Despite the new regulations governing 13 CFR 125 and FAR 52.219-14, small businesses are still losing contracts due to violations of the subcontracting rules.

The regulations require that in order for a government contractor to be awarded a full or partial small business set-aside contract with a value greater than $150,000, an 8(a) contract, an SDVO SBC contract, a HUBZone contract, a WOSB or EDWOSB contract, small businesses must agree that:

• In the case of a contract for services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. See 13 CFR 125.6.
• In the case of a contract for supplies from a nonmanufacturer, it will supply the product of a domestic small business manufacturer or processor, unless a waiver as described in13 CFR 121.406(b)(5) of this chapter is granted.
• For a multiple item procurement where a waiver as described in 13 CFR Part 121.406(b)(5) of this chapter has not been granted for one or more items, more than 50% of the value of the products to be supplied by the nonmanufacturer must be the products of one or more domestic small business manufacturers or processors.
• (B) For a multiple item procurement where a waiver as described in §121.406(b)(5) of this chapter is granted for one or more items, compliance with the limitation on subcontracting requirement will not consider the value of items subject to a waiver. As such, more than 50% of the value of the products to be supplied by the nonmanufacturer that are not subject to a waiver must be the products of one or more domestic small business manufacturers or processors.
• For a multiple item procurement, the same small business concern may act as both a manufacturer and a nonmanufacturer.

13 CFR 125.6 Governs the Prime Contractor’s Responsibility 

Is violation of the limitations on subcontracting a good legal argument for a traditional bid protest?

The important aspects of 13 CFR 125.6 fall within the purview of whether a small prime contractor is responsible or not. This means that if a company is planning on filing an SBA size protest, complying with 13 CFR 125.6 should not be the main argument in a traditional GAO bid protest. Otherwise, the case will be dismissed.

Mixed Contracts Under 13 CFR 125.6

There are many situations where there is a combination of services and supplies in a particular government solicitation. The contractor’s assignment of the NAICS code is important. See 13 CFR 121.402(b). When it comes to mixed contracts, each case is fact-specific. However, small businesses must be extremely careful how they asses when they are in complying with 13 C.F.R. 125.6 when mixed contracts are involved.

What is a Similarly Situated Small Business? How Does in Play into the Limitation on Subcontracting Analysis?

15 U.S.C. 657, mandates that the limitationson subcontracting for total or partial small business set-aside contracts, HUBZone contracts, SBA 8a contracts, Service-Disabled Veteran-Owned (SDVOSB) Small Business Concern (SBC) contracts, and WOSB and Economically Disadvantaged Women-Owned Small Business (EDWOSB) contracts must meet the limitations requirements under 13 C.F.R 125.6 and FAR 52.219-14. The calculations are based on the overall percentage of the contract award amount that your company as the prime contractor spends on subcontractors.  (labor costs are not the popular standard anymore.)

The NDAA excludes from the limitations on subcontracting calculation the percentage of the award amount that the prime contractor spends on similarly situated entity subcontractors. A similarly situated small business is one that:

• Meets the small business status /category that the government sets the work aside for, and
• It is also small under the NAICS code provided by the prime contractor.

Penalties for Violating Limitation on Subcontracting Requirements Under 13 CFR 125.6 and FAR 52.219 14

Penalties for violators for failure to comply with the spirit and intent of a subcontract under 13 CFR 125.6 and FAR 52.219-14 with a similarly situated entity may be considered a basis for suspension or debarment on the grounds, including but not limited to, that the parties have violated the terms of a Government contract or subcontract pursuant to FAR 9.406-2(b)(1)(i) (48 CFR 9.406-2(b)(1)(i)). See information about lack of standing.

Conclusion:  Does Your Company Run the Risk of Violation the Limitation on Subcontracting Rules?

Making sure that your proposal contents stay clear of any violation of the subcontracting requirements can be a challenge. Look to see if you r subcontractors are similarly situated small businesses. Running the risk of violating the limitations on subcontracting regulations can be a very costly mistake for the company. Not only can you lose your contract in a bid protest. You can also find your company criminally liable in a government contract fraud case.

Losing the contract can be catastrophic For help complying with the limitations on subcontracting set forth in 13 CFR 125.6, call Watson & Associates, LLC’s government contracts attorneys at 1866-601-5518.