SBA affiliation and identity of interest

Theodore P. Watson, Esq.

Given the new SBA rule about small business set aside subcontracting rules, small businesses must pay special attention to the specific requirements of 13 CFR 125.6 and limitations on subcontracting requirements.

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).

Your proposal has to be readily apparent that you do not meet the subcontracting requirement.

If you submit a government bid 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.

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.

Despite the proposed rule and new regulations governing 13 CFR 125 and FAR 52.219-14, 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 done by 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 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 CFR 125.6.

What is a Similarly Situated Small Business?

15 U.S.C. 657, mandates that the limitations on 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 CFR 125.6 and FAR 52.219-14. The calculations are based on the overall percentage of the award amount that your company as the prime contractor spends on subcontractors.

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
  • Is also small under the NAICS code provided by the prime contractor.

Penalties for Violating Limitations on Subcontracting Requirements Under 13 CFR 125.6

Violating the small business set aside subcontracting rules 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 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.

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.