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SBA Proposes Rules Affecting Small Business Set-Aside Contracts and Subcontracting

Jan 18, 2015

Limitations on Subcontracting Face Major Changes

The U.S. Small Business Administration (SBA) recently issued a proposed rule to enact the changes implemented by Congress in the National Defense Authorization Act of 2013, including a sweeping rewrite of the way that compliance with the subcontracting limits is calculated and enforced.

SBA is soliciting comments on this proposal by February 27, so NECA is studying it in-depth. In the meantime, here’s a quick look at the major changes proposed:

Limitations on Subcontracting

The prime contractor is still required to perform 50% or more of the work under both service and supply contracts, but the method of calculating the 50% will change. The proposed rule shifts the formula from a “cost-based” analysis that looks at the percentage of total personnel or manufacturing costs spent on subcontractors, to a “percentage of the total award amount” that is spent on subcontractors.

Under the new method, the small business prime may not spend more than 50% of the total award amount on subcontractors that are not similarly situated to the prime. This provision is intended to ensure that the majority of work under a small business set-aside contract is performed by a contractor with the applicable size and socioeconomic status, and not passed through to large businesses or ineligible small businesses beyond the applicable limits.

Notably, the new rule creates an exclusion from the limitations on subcontracting for “similarly situated entities” which would allow small businesses to satisfy performance requirements by subcontracting to other small businesses that are also participants of the same small business program that qualified the prime contractor to receive the award. However, the “similarly situated entity” subcontractor is subject to the same limitations on subcontracting. Additionally, the proposed rule includes new provisions regarding certification requirements and includes penalties for noncompliance with subcontracting limitations that include imprisonment, civil fines, and suspension and debarment.

Affiliation

The proposed rule would establish rebuttable presumptions of affiliation based on family relationships and circumstances when a concern derives more than 70% of its revenue from another entity. The proposed rule also adds an affiliation exclusion for a joint venture where each party to the joint venture qualifies as small under the applicable size standard.

Other Changes

The SBA proposes to make changes to regulations concerning the non-manufacturer rule, clarification on who may bring a size status protest, and North American Industry Classification System Code (NAICS) appeals’ procedures.

Smith, Currie & Hancock, a firm specializing in construction law and government contracting, has prepared some commentary on this proposal that you may find interesting.

Read comments from Smith, Currie & Hancock