Small businesses become fertile ground for federal investigations when they either subcontract out too much work or simply engage in pass-through contracting. If you are new to federal contracting or an existing government contractor, you should promptly get up to speed on government subcontracting the basics IAW FAR 52.219 8 Utilization of small business concerns.
Over 20 years ago, subcontracting government contracts with small businesses only became an issue when the government awarded full and open procurements or when large businesses were awarded a federal contract. Nowadays, FAR subcontracting and federal government contracts has become more of an issue in the courts. Issues such as violation of the limitations on subcontracting become problematic for many small businesses.
Common issues related to government contracting that become problematic include:
- Manufacturer rule
- SBA affiliation rules when subcontracting to other contractors
- Knowing whether your teaming agreement can be enforced in court, and
- Knowing the difference between a joint venture and teaming agreement when subcontracting government contracts
Who are government subcontractors?
What are subcontracting limitation requirements. These are two of the basic questions for understanding government business contracts and FAR regulations governing your subcontractor contract.
Although some of the SBA regulations have changed to avoid affiliation, you can still be found affiliated if you violate the limitation on subcontracting regulations or in some other way violates SBA affiliation rules.
Does the agency have to approve a subcontractor?
A government contracting agency does not normally have to consent to subcontracts for firm-fixed-price contracts. However cost-type contracts will require consent if the contract price is over a certain dollar value. When companies are looking for US government contracts for small businesses, they must also be aware of the liability that flows from being a subcontractor. The government still has some reach to you as a subcontractor through flow-down clauses.
If you are a subcontractor, remember that you still have an obligation to understand your obligations to the federal government and how to avoid criminal liability.
Government Subcontracting Basics About Small Business Subcontracting Plans
As a general rule, for full and open (unrestricted procurement) government contracts in excess of $550,000.00 ($1,000,000.00 for construction) require the prime contractor to submit a subcontracting plan allowing reasonable consideration for government subcontracting opportunities for small businesses.
Under FAR 52.219-8 These are important aspects of your proposal when the agency considers price realism and price reasonableness evaluations. Some agencies are also now requiring small business participation plans for other than full and open requirements.
Federal Government Subcontracting Clauses
With regards to utilizing small business, prime contracts generally contain subcontracting clauses that should be included in the subcontract. The Federal Acquisition Regulation (FAR) has approximately 36 or more contract requirements that “flow down” to subcontractors. It is critical that contractors ( prime or subcontractors) have attorneys that can explain, negotiate or comply with these sweeping clauses.
FAR 52.219 8 — Utilization of Small Business Concerns.
It is the policy of the United States that small business concerns, veteran-owned small business concerns, service-disabled veteran-owned small business concerns, HUBZone small business concerns, small disadvantaged business concerns, and women-owned small business concerns shall have the maximum practicable opportunity to participate in performing contracts let by any Federal agency, including government business contracts and subcontracts for subsystems, assemblies, components, and related services for major systems.
It is further the policy of the United States under FAR 52.219 8 that its prime contractors establish procedures for utilization of small business concerns and the timely payment of amounts due pursuant to the terms of their subcontracts with small business concerns, veteran-owned small business concerns, service-disabled veteran-owned small business concerns, HUBZone small business concerns, small disadvantaged business concerns, and women-owned small business concerns.
Government Subcontractor Contract Information for Claims
There is a general consensus that there is no privity of contract between the government when government subcontractor contracts are involved (See Merritt v. U.S., 267 U.S. 338.) The fact that the government may approve a subcontractor does not substitute the privity of contract analysis. In other words, subcontractors cannot sue the government directly absent an express or implied contract between the government and the subcontractor ; as well as the prime contractor. See also article on equitable subrogation.
A typical situation for expressed or implied contract could be when the government instructs the subcontractor on the project to do something (change) and assures the subcontractor that the contract will be modified.
Regarding claims against a prime contractor for nonpayment or breach of contract, the terms of the subcontract generally control and should be litigated in the appropriate state or federal court (Federal Miller Act Claims are generally brought a federal district court where the project is performed).
If you are involved in this process for utilization of small business concerns and are developing a subcontractor contract and need to find out more about government subcontracting basics under FAR 52.219 8, call one of our government contracts lawyers at 1-866-601-5518.