Despite the new regulations, small businesses are still losing contracts due to a violation of the 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 similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. See 13 CFR 125.6
- In the case of a government contract for supplies or products (other than from a nonmanufacturer of such supplies), 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 similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Cost of materials is excluded and not considered to be subcontracted.
- 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
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. Otherwise, the case will be dismissed.
Mixed Contracts Under 13 CFR 125.6
There are may 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 CFR 125.6
Penalties for Violating Limitations on Subcontracting Requirements Under 13 CFR 125.6
Violating the limitations on subcontracting regulations can have a grave impact on your company’s future. This why it is important to make sure that the respective players in the contract performance are in compliance.
Penalties for violators for failure to comply with the spirit and intent of a subcontract under 13 CFR 125.6 with a similarly situated small business 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.
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.