Limitations on Subcontracting SBA Changes for Contractor Plans and Payment Amounts

Effective June 30, 2016, the Small Business Administration (SBA subcontracting) changed some of the key points in the limitations on subcontracting clauses for small business set-aside contracts. Failure to properly assess compliance could potentially cost you the contract in a bid protest or even cause your company to be subject to civil and criminal investigations by the DOJ or IG.

Instead of the old “50 percent rule” the calculation for a subcontractor plan and how to calculate limitations on subcontracting would be based on a percentage cap on the total prime contract cost instead of the old 50% of labor cost rule. FAR 52.219-14 has been completely changed to simplify the effect and ability to monitor a contractors’ plan.

The limitations on subcontracting regulations virtually stay the same except for the approach of calculating how much work would be delegated to subcontractors. Small businesses should pay attention to the new FAR small business set aside subcontracting rules because challenges in a bid protest could be damaging now that the assessment is much simpler to perform.

How to Calculate Mixed Contracts

A common problem occurs when calculating the 50% limitation on contracting numbers for mixed contracts. Mixed contracts are those that include both supplies and services. FAR 52.219-14 (e)(1) suggests that if a government contract is assigned a NAICS code for services, the 50% limitation only applies to the services portion of the contract. Likewise,  if the contracting officer assigns a NAICS code for supplies, the 50% limitations on subcontracting then apply to the supply part of the contract.

Limitation on Subcontracting Changes for Service and Supply Contracts

 Under the new limitations on subcontracting rules, the small business prime has to agree that a subcontractor’s plan will not in any way pay more than 50 percent of the prime contract cost to the subcontractor.

Construction Contracts: For general construction contracts, the limitation on subcontracting rule allows subcontracts for no more than 85 percent of the prime contract value to subcontractors. However, for specialty trade construction the limitation percentage is 75 percent.

SBA Subcontracting — Affiliation and Similarly Situated Small Businesses

 The highlight of the new limitations on subcontracting provisions suggests that subcontracting costs paid to “similarly situated small business” companies would not be considered as being subcontracted and therefore excluded from the limitation provisions.

Application to Simplified Acquisitions Only For Small Business Set-Asides: Small businesses awarded government contracts between $3,000 and $150,000 would be exempt from the limitation on subcontracting rule requirements.  As the SBA pointed out, the limitations on subcontracting clause, FAR 52.219-14, would only apply to procurements greater than the simplified acquisition threshold. However,  when contracts are awarded to 8(a) companies, HUBZone, SDVOSB, and WOSB/EDWOSB, the prime’s subcontractors’ plan for payment is still subject to the limitations on subcontracting rule, regardless of the amount.

SDVOSB Subcontracting Rules

The application of the SDVOSB subcontracting rules is the same as any other small business category under 13 CFR 125.6.  So long as the contract is above the simplified acquisition threshold, and is either a full or partial small business set-aside contract, then any company in service-disabled veteran-owned small business program must meet the following guidelines.

• In the case of a government contract for services (except federal construction), SDVOSB companies 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 teaming / subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Other direct costs may be excluded to the extent they are not the principal purpose of the acquisition and small business concerns do not provide the service, such as airline travel, work performed by a transportation or disposal entity under a contract assigned the environmental remediation NAICS code (562910), cloud computing services, or mass media purchases. In addition, work performed overseas on awards made pursuant to the Foreign Assistance Act of 1961 or work required to be performed by a local contractor, is excluded.
•  In the case of a federal contract for supplies or products (other than from a nonmanufacturer of such supplies), companies in the service-disabled veteran owned small business program will not pay more than 50% of the amount paid by the federal 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 are excluded and not considered to be subcontracted.
•  In a situation where the contractor is for supplies from a nonmanufacturer, the small business will supply the product of a domestic small business manufacturer or processor, unless a waiver as described in 13 CFR 121.406(b)(5) is granted.

Small Business Set Aside Subcontracting Rules — Similarly Situated Entity Definition and Meaning

To avoid affiliation attacks under SBA small business set aside subcontracting rules a similarly situated entity means a small business subcontractor that has the same small business program status as the prime contractor. For example is the procurement is a HUBZone set-aside or awarded to a HUBZone participant, the targeted subcontractor would also be a qualified HUBZOne.

To meet the definition, they should also be able to perform under similar NAICS codes and be recognized as a small business under that specific code allocated to the subcontract work. Companies should be aware of the new “similarly situated” rule.

The similarly situated entity rule also means that the work accomplished by the similarly situated subcontractor will also count towards the work performed by the prime contractor when calculating limitation in subcontracting percentages.

Speak to an Attorney & Get a Free Initial Consultation

For help readjusting to the new SBA small business set aside subcontracting rule changes for contractor and payment amounts, call our government small business attorneys at 1-866-601-5518.