Effective June 30, 2016, the Small Business Administration (SBA subcontracting) changed some of the key points in the limitation on subcontracting clauses for small business set-aside contracts.
Instead of the old “50 percent rule” the calculation for a subcontractor plan 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 and small business set aside subcontracting rules because challenges in a bid protest could be damaging now that the assessment is much simpler to perform.
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 suggest 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 business 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.
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.
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.