SBA Limitations on Subcontracting Rule Tips FAR 52.219-14 & 13 CFR 125.6

Avoid Costly Mistakes Under the FAR 52.219-14 Limitations on Subcontracting Clause & 13 CFR 125.6

Submitting a proposal to the federal government implies that you will comply with the new FAR limitations on subcontracting rules or small business set aside percentage of work such as 13 CFR 125.6 and FAR 52.219-14. Under the proposed rules (now into law), many companies take this contract requirement lightly during the bidding process. However, there are many cases and bid protests where bidders are losing contracts for failure to comply.

If your proposal, on its face, leads an agency to the conclusion that you could not and would not comply with the FAR subcontracting limitations, the agency can decide that your proposal is technically unacceptable and may not form the basis for an award. This may apply to either LPTA or best value contracts.

Small businesses seeking to protest the awardee’s compliance with 13 CFR 125.6 limitation on subcontracting must avoid the disastrous mistake of filing a protest at the SBA level. Such a protest would be dismissed. Get legal help before you lose your contract.

Regarding small business set aside subcontracting rules, Government contractors must also be aware of the issues that arise under 13 CFR 125.6 bid protest challenges. For example, one of the major issues that come up is whether the prime contractor is performing the primary and vital parts of the contract. Failure to understand this rule can lead to painful results.

Accounting for target personnel

When submitting your government proposal, you want to make sure that you track your key personnel and employees back to the Statement of Work. Many companies leave themselves open to litigation because their proposals may not be clear about what the prime contractor is doing compared to what the subcontractor is doing under the contract.  With regard to your small business set aside subcontracting rules, if you have subcontractors or teaming partners, complying with the 13 CFR 125.6 and FAR 52.219 14 limitations on subcontracting rule can be fertile ground for attack. Consider the following tips.

  • Make sure that your key personnel are employees and not independent contractors ( have letters of intent)
  • Simply stating that you will perform a certain percentage of the work will not suffice. You must demonstrate more.
  • When providing labor categories for the small business set aside percentage of work, show what categories belong to your company – as employees.

Severe Sanctions for SDB Contractors that Violate the Limitations on Subcontracting Rule: If you are caught during performance violating the FAR government subcontracting rules or limitation on subcontracting clause under the Code of Federal Regulations 13 CFR 125.6, there can be stiff penalties.

Pay Attention to the Primary and Vital Contract Requirements

The “ostensible subcontractor” rule provides that when a subcontractor is actually performing the primary and vital requirements of the contract, or when the prime contractor is unusually reliant upon the subcontractor, the two firms are affiliated for purposes of the procurement at issue. 13 CFR 121.103(h)(4). The “primary and vital” requirements are those
associated with the principal purpose of the acquisition. Size Appeal of Santa Fe Protective Servs., Inc., SBA No. SIZ-5312, at 10 (2012);

FAR 52.219 14 requires that when you submit a proposal in response to a solicitation designated as a small business set-aside agree that “[a]t least 50% of the cost of the contract shall be expended by the prime contractor].” The amount of the limitation is NAICS specific. 

  • Regardless of the recent SBA affiliation rules, you still have to comply with the requirements of FAR Clause 52.219 14 and 13 CFR 125.6.

When you are drafting teaming agreements or engaging in joint venture relationships, you must also be aware of the subcontracting rules for similarly situated small business teaming partners.

  • Be mindful that under small business set aside subcontracting rules the there is a limitation on the amount of work that the similarly situated small business can subcontract out to a large business.
  • Consider adding certification clauses to your teaming agreement where your subcontractors certify that they are small and that they will comply with the FAR Subcontracting Clause

Applying SBA New Approach to Limitation on Subcontracting Rules

SBA has developed a new approach to the limitations on subcontracting compliance. As a small business you more options to comply with the regulations. These

  • You must at the end of the day  comply with the limitations
  • Your company must spend the required amount on work performed in-house.
  • Generally, the amount  spent on subcontracts should not exceed 50 percent of the price of the prime contract, for other than construction contracts;
  • Your small business can decide to subcontract work to a similarly situated entity, in any amount of its choosing, that it previously subcontracted or performed in-house, and it will be in compliance with the new limitations on subcontracting.
  • As a general rule, government contracting work performed by a similarly situated entity is counted as if it were performed by the prime contractor.

Applicability of FAR Clause 52.219-14 Limitations on Subcontracting

Limitations on Subcontracting (JAN 2017)

(a) This clause does not apply to the unrestricted portion of a partial set-aside.

(b) Applicability. This clause applies only to –

(1) Contracts that have been set aside or reserved for small business concerns or 8(a) participants;

(2) Part or parts of a multiple-award contract that have been set aside for small business concerns or 8(a) participants; and

(3) Orders set aside for small business or 8(a) participants under multiple-award contracts as described in 8.405-5 and 16.505(b)(2)(i)(F).

(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for –

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

13 CFR 125.6 Statutory Language

(a) General. In order 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 pursuant to part 127 of this chapter, a small business concern must agree that:

(1) 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.

(2)(i) In the case of a 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 are excluded and not considered to be subcontracted.

(ii) 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 in §121.406(b)(5) of this chapter is granted.

(A) For a multiple item procurement where a waiver as described in §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.

(C) For a multiple item procurement, the same small business concern may act as both a manufacturer and a nonmanufacturer.

COMPLIANCE

Your past performance can be impacted for failure to comply with the FAR limitations on subcontracting clause in your contract. The contracting officer representative may be the one to help or not to help the how you are credited for past performance. Certainly, your CPARS ratings will more than likely include how you complied with FAR 52.219-14.

WHAT HAPPENS IF YOU ARE NOT IN COMPLIANCE?

If your company is deemed non-compliance with the FAR subcontracting rules, you will more than likely lose the contract award. If the SBA wants to push the issue it may also find that you may have violated the NAICS size requirements. This where you want to make sure that you have experienced SBA protest counsel on board.

Bottom Line: See changes to the limitation on subcontracting rule here: Where your proposal reasonably leads a government contracting agency to the conclusion that you have not agreed to comply with the FAR 52.219-9 and 13 CFR 125.6 government subcontracting limitation, the matter is one of the proposal’s acceptability. Your proposal can be thrown out. Therefore, if your technical submissions contradict the SBA limitations on subcontracting rule, filing a GAO protest can be a grave mistake. See also information about your letter of intent when submitting government bids.

Avoid Costly Mistakes in SBA Program Litigation. See What We Do to Help

For additional help to make sure that you are complying with the FAR 52.219 14 limitations on subcontracting clause and the application of 13 CFR 125.6, call our government contract law attorneys at 1-866-601-5518.

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