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SBA Limitation on Subcontracting Rules Undergoes Major Change

Posted on June 1st, 2016 by

Effective June 30, 2016, the SBA’s limitation on subcontracting rules will undergo a major change. Now, a small business prime contractor can count subcontractor work towards its self-performance requirement if the subcontractor is “similarly situated.”  The new regulation defines a similarly situated entity as follows:

Similarly situated entity is a subcontractor that has the same small business program status as the prime contractor. This means that: For a HUBZone requirement, a subcontractor that is a qualified HUBZone small business concern; for a small business set-aside, partial set-aside, or reserve a subcontractor that is a small business concern; for a SDVO small business requirement, a subcontractor that is a self-certified SDVO SBC; for an 8(a) requirement, a subcontractor that is an 8(a) certified Program Participant; for a WOSB or EDWOSB contract, a subcontractor that has complied with the requirements of part 127. In addition to sharing the same small business program status as the prime contractor, a similarly situated entity must also be small for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform.

In plain terms, if a subcontractor meets the small business eligibility requirements under a particular procurement, then work performed by that subcontractor will be treated as if performed by the prime contractor. For example, in an SDVOSB set aside procurement, if the subcontractor qualifies as an SDVOSB, the prime contractor can credit that subcontractor’s work towards the prime contractor’s self-performance requirement. The revised regulation will permit more subcontracting on small business set asides.

However, the SBA’s limitation on subcontracting regulation limits the “similarly situated” subcontractor rule to first tier subcontractors only:

SBA will apply the limitations on subcontracting collectively to the prime and any similarly situated first tier subcontractor, and any work performed by a similarly situated first tier subcontractor will count toward compliance with the applicable limitation on subcontracting. Any work that a similarly situated first tier subcontractor subcontracts, to any entity, will count as subcontracted to a non-similarly situated entity for purposes of determining whether the prime/sub team performed the required amount of work. In other words, work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count as subcontracts performed by non-similarly situated concerns.

The SBA’s limitation on subcontracting rules also change the way percentage of work is calculated for services and supply contracts. Instead of focusing on cost of labor, the SBA will base percentage of work on how much the Government pays for a particular service or supply:

General. In order to be awarded a full or partial small business set-asidecontract 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, with a value greater than $150,000, a small business concern must agree that:

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.

 Affiliation

 The new SBA regulations create a presumption of affiliation based on two additional grounds:

  • Firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings.
  • If a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated.

The above presumptions of affiliation have long be recognized in case law decisions.  The regulations now codify them.

Joint Ventures

SBA regulations create an exclusion from affiliation for small business size status to allow two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that procurement requirement. This will encourage more joint venturing of small businesses.

 

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