Business Partnership Contract & Agreements

SBA Limitations on Subcontracting Rule Tips FAR 52.219 14 & 13 CFR 125.6Submitting a proposal to the federal government implies that you will comply with the new SBA limitation on subcontracting rules such as 13 CFR 125.6.

If your proposal, on its face, leads an agency to the conclusion that you could not and would not comply with the FAR subcontracting limitation, the agency can decide that your proposal is technically unacceptable and may not form the basis for an award.

Small businesses seeking to protest the awardee’s compliance with 13 CFR 125.6 limitations on subcontracting must avoid the disastrous mistake of filing a protest at the SBA level. Such a protest would be dismissed.

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.

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].”

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 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 subcontracting limitation rules. 

FAR 52.219 Government Subcontracting Clause Language

Under FAR 52.219 14  Limitation on Subcontracting Clause and 13 CFR 125.6, there are specific requirements that you must follow when submitting proposals/ The following excerpts from the clause are important.

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

(b) 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.

Avoid Costly Mistakes Under the SBA Limitations on Subcontracting Rule 13 CFR 125.6

When submitting your government proposal, you want to make sure that you track your key personnel and employees back to the Statement of Work. If you have subcontractors or teaming partners, complying with the 13 CFR 125.6 and FAR 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, 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.

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 SBA limitations on subcontracting rule and the application of 13 CFR 125.6, call our government contract law attorneys at 1-866-601-5518.

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