New rules for limitations on subcontracting now in effect

      A long-awaited final rule revising and standardizing the limitations on subcontracting for small business federal contractors went into effect on Sept. 10, aligning Federal Acquisition Regulation (FAR) language for the limitations more closely with Small Business Administration regulations.

      The FAR Council issued the final rule on Aug. 11. It is intended to clear up confusion about how the limitations will be defined and applied.

      The government’s longstanding limitations on subcontracting rules generally have been applied to prevent small vendors from becoming used to pass through set-aside contract dollars to large companies. The rules generally require that small business prime contractors perform a specific percentage of the work and limit the amount of work that can be subcontracted.

      The National Defense Authorization Act for fiscal 2013 created an exception allowing work subcontracted to “similarly situated entities” to count toward the prime’s performance. In other words, work performed by the similarly situated entities does not count against the limit on subcontracting.

      SBA implemented this exception in its regulations in 2016, and the FAR Council issued a proposed rule in 2018, but the final rule revising the FAR to align with the SBA approach did not go into effect under the final rule until this month.

      Legal consultants say that the changes are intended to reduce confusion. “It is unlikely much will be changed in terms of how SBA will treat these matters, but it cements the long-existing standards into the FAR, which provides some clarity,” John Holtz, attorney with Koprince McCall Pottroff LLC, wrote in a recent blog.

      Despite the effort to align the FAR with SBA regulations, the Civilian Agency Acquisition Council on Aug. 13 issued a memo suggesting that civilian agencies utilize class deviations to implement several more updates to the FAR and SBA rules regarding the limitations on subcontracting to align them more fully.

What is in the final rule?

      The final rule defines “similarly situated entity” and makes the following additional changes regarding such entities:

• It defines a “similarly situated entity” as a first-tier subcontractor that (1) “Has the same small business program status as that which qualified the prime contractor for the award”; and (2) “Is considered small for the size standard under the NAICS code the prime contractor assigned to the subcontract”;
• It clarifies that for a small business set-aside contract made without regard to socioeconomic status, any small business with the size standard of the NAICS code assigned to the contract can be a similarly situated entity;
• For subcontracting, the 50% limitation only applies to the services part of a mixed contract if the contract has a services NAICS code, and only applies to the supplies part of a mixed contract if the contract has a supplies NAICS code;
• The final rule says that if similarly situated subcontractors use their own subcontractors, the work of the second-tier subcontractor is counted towards the limitation on subcontractors;

      The final rule makes some other changes, including modifications to the nonmanufacturer rule, including:

• Both the limitations on subcontracting and the nonmanufacturer rule now will apply to contracts awarded using the HUBZone price evaluation preference, regardless of dollar value. It does not apply if the firm waived the price preference;
• The final rule also applies to small business set-asides for federal supply schedules under FAR 8.405-5 and indefinite-delivery contract orders outside of the fair opportunity process under FAR 16.505;
• The nonmanufacturer rule and the limitations on subcontracting apply to set-asides and sole source awards made pursuant to FAR subparts 19.8, 19.13, 19.14, and 19.15, regardless of dollar value;
• For a set-aside contract, compliance with the limitations on subcontracting is required by the end of the base term and by the end of each option period, or by the end of the performance period for each task order, at the contracting officer’s discretion; and
• The limitations on subcontracting and the nonmanufacturer rule do not apply to small business set-aside contracts below the simplified acquisition threshold (currently $250,000).

More information:
CAAC memo: https://bit.ly/3tU90Ku
PilieroMazza PLLC: https://bit.ly/3hN5wF8
John Holtz blog: https://bit.ly/2XpIZXr
Bradley Arant Boult Cummings LLP: https://bit.ly/3nMPb6S
Also, see the Column in this issue: Column

New rules for limitations on subcontracting now in effect

Contractors prepare for vaccine rules

Another shutdown?

Set-asides surge in September to quadruple monthly average

Min. wage rule

VA certs go to SBA on 1/1/23

Column: Avoiding FCA Violations from Limitations in Subcontracting and Performance of Work Requirements

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