SBA Limitation Subcontract Rule Tips FAR 52.219-14 & 13 CFR 125.6 FAR Subcontracting for Small Businesses FAR 52.219-14

Small businesses find themselves making disastrous mistakes when they use a teaming partner or named subcontractor when bidding on federal government contracts. Many companies that are not aware of how to calculate limitations on subcontracting under FAR small business set aside subcontracting rules can find themselves subject to a bid protest or even in violation of SBA affiliation rules.

Competitors are aware of the rules and their challenge can cause you to lose the contract to a small business size protest. The new limitation on subcontracting rules, if not applied correctly can place the awardee in a difficult position without the proper help. 

When it comes to government contracts for small business and the limitation on subcontracting there is generally a difference in the rules, especially as applied to each small business concern. The limitiations apply to small businesses when there is a contract for services, supplies or construction. Changes to limitations on subcontracting regulations have a few unique applications that government contractors should be well aware of.  See new rules here.

Where applicable to contracts for supplies, the Limitation on Subcontracting Clause portion of FAR 52.219 14(c)(2) requires that a contractor “shall perform sub contract work for at least 50 percent of the cost of manufacturing the supplies [provided the government], not including the cost of materials.” FAR 52.219-14(c)(2). See also 13 CFR 125.6.

Under the new changes for small business set aside subcontracting rules, Section 1651 of the NDAA, as codified at 15 U.S.C. 657, requires that the various types of small business set-asides be based on the percentage of the overall award amount that a prime contractor pays subcontractors. As a new benefit to small businesses, the new rules have included the confusing term “similarly situated” businesses. The legal applications of the rule further  the notion that the rules will exclude the statutorily required percent when primes subcontract to “similarly situated companies.”

What is a similarly situated small business?  The definition of this new government contracting term focuses on the subcontractor being a small business that is part of the socio-economic designation or SBA program to which the prime contractor is eligible for.

When calculating compliance with the new SBA rules and sub contract work, government small business contractors also have to look at whether the procurement is for services, construction, supplies or a specialty trade. The subcontract limitation rule now focuses on the amount spent on subcontractors.

  • The rule attempts to limit the potential for affiliation allegations
  • It also increases oversight for small businesses that pass on work to contractors that are other than small.

Under 13 CFR 125.6 and FAR 52.219 14 Companies that are small businesses, HUBZone SBCs, SDVO SBCs, WOSBs/EDWOSBs, and 8(a) certified must still be mindful that although the limitations on subcontracting rule reduce the chance of affiliation, the SBA affiliation rules can still apply in certain situations.

Contracting Officer’s choice of NAICS code: The application of the new rules will first depend on what NAICS code that the contracting officer chooses for the procurement.

The cost of materials: under the new FAR limitations on subcontracting rules,  the cost of materials does not apply to service contracts. Instead, government contractors should focus on applying material costs to supply, construction contracts, or specialty trade construction set-aside contracts.

Mixed contracts:  When implementing the limitation on subcontracting rules, the contracting officer will first make a decision as to which category, services or supplies, has the greatest percentage of the contract value, and then assign the appropriate NAICS code.

  •  If there is a procurement mixed with supplies and services, the subcontract rules apply only to subcontracts that correspond to the principal purpose of the prime contract.
  • A government contract that is mostly for services, but also has a supplies component, the prime contractor or its similarly situated subcontractors cannot subcontract more than 50 percent of the services to other than small concerns. However, the prime contractor can subcontract all of the supply components to any size business.

GAO Bid Protest Analysis and Formula FAR 52.219-14: In its bid protest decisions dealing with government contracts for small businesses and limitations on subcontracting, GAO has adopted the following formula for determining whether a contractor is in compliance with the limitation on subcontract clause (FAR 52.219-14(c)(2)) when issuing subcontracting work:

“[T]he total contract cost (including profit) fewer materials and subcontracting costs is to be compared with all subcontracting costs less the subcontractor’s materials costs.”

Although the text of FAR 52.219 14(c)(2) might be assumed to require a simple comparison of the labor costs of the prime contractor and the labor costs of all of its subcontractors, both the GAO and the Small Business Administration (SBA) have found that a more comprehensive formula is required to find compliance with FAR 52.

Court of Federal Claims FAR Limitations Analysis — FAR 52.219-14

 In Excel Manufacturing Ltd. v. U.S., Case No. 13-361C (July 24, 2013), the Court of Federal Claims decided how to comply with the Limitations on Subcontracting clause. This case involved a post-award bid protest in which the protestor asserted that the awardee would not perform the requisite amount of work under the supply contract to comply with the clause.

The protestor contended that General & Administrative (“G&A”) and profit should not be considered in determining whether the awardee would comply with the FAR subcontracting limitations contained in the small business Limitations on Subcontract Clause. See also information about FAR 52-219-9.

In the bid protest, the Court of Federal Claims scrutinized the language of the Small Business Limitations on Subcontracting Clause which states that the contractor “shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.”

Application of the Small Business Limitations on Subcontracting Clause for Services Contracts

When it comes to government contracts for services, there is a different application for the Small Business Limitations on Subcontracting Clause. The rules require that for service contracts, calculations apply labor cost. In other words, you should look at the “cost of contract performance” in determining compliance with the FAR clause.

  • Unless a proposal “leads” the agency to question the awardee’s work as a possible violation of the Limitation on Subcontracting Clause, it is generally reasonable for the agency to accept your proposal and determine compliance with that clause after the award decision has been made.

As a general rule, an agency’s judgment as to whether a small business concern will comply with the FAR subcontracting regulations is a matter of responsibility, and the contractor’s actual compliance with the provision is a matter of contract administration. See Orincon Corp., B-276704, July 18, 1997, 97-2 CPD ¶ 26 at 4.

Technically Unacceptable Evaluations: Where your government proposal on its face, should lead the agency to the conclusion that you could not and would not comply with the limitation on subcontracting rules under FAR 52.219, GAO and other bid protest courts have considered this to be a matter of the proposal’s technical acceptability.

  • If your proposal fails to conform to a material term or condition of the solicitation such as limitations on subcontracting requirements, especially when using teaming agreements, it will be deemed unacceptable and may not form the basis for an award. 

SBA Responsibility Determination: If you are a small business and the agency’s judgment as to whether you will be able to comply with the Small Business Government Subcontracting Clause is a question of responsibility for review by the SBA. See 13 CFR 125.6(f).

However, the GAO has consistently held in bid protests that where your proposal, on its face, should lead an agency to the conclusion that you have not agreed to comply with the FAR subcontracting clause, the matter is one of the proposal’s acceptability. 

Suggestion to Contractors: When you write a government proposal, you should articulate the portions of the work that you intend to perform as well as that of your subcontractors.

  • Failure to do so may cause the contracting agency to guess (sometimes wrong) that you have not met the limitation in government subcontracting requirements and it may cause you to be eliminated from the competition.

See also information about government small business subcontracting plans.

Speak to an Attorney & Get a Free Initial Consultation

For more information regarding FAR 52.219-14 Limitations on Subcontracting Clause or for help with small business FAR subcontracting plans, call our legal professionals at 1-866-601-5518 for a free initial consultation.

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