On May 31, 2016, the Small Business Administration (SBA) issued a Final Rule in the Federal Register that provides many long overdue regulatory updates and clarifications relating to small businesses engaged in U.S. Government contracting.
The Final Rule was originally proposed by the SBA in the Federal Register on December 29, 2014. It primarily addresses requirements in Section 1621 of the National Defense Authorization Act of 2013. The comment period for the proposed rule closed over a year ago.
Perhaps most significantly, the Final Rule makes important changes to the limitations on subcontracting requirement, and to affiliation rules that limit the manner in which contractors may work together to win and perform government contracts set-aside for small businesses.
Currently, SBA regulation 31 CFR 125.6 requires a small business that receives a set-aside contract to perform at least 50 percent of the cost of contract performance using its own employees. This requirement is implemented by incorporation of a Federal Acquisition Regulation (FAR) clause, 52.219-14, Limitations on Subcontracting, in most solicitations and contracts set-aside for small businesses.
Under the Final Rule, the limitations on subcontracting requirement is changed in six important ways:
1. The 50% limitation will now be based on the overall contract award amount and the amount spent by the small business prime contractor on subcontractors, rather than on the cost of performance. This change will significantly simplify the calculations required to monitor compliance with the requirement.
2. Small business prime contractors will now be able to subcontract to small businesses that are "similarly situated" in terms of their small business size status, without counting that work as subcontracted for purposes of compliance with the limitations on subcontracting requirement.
3. When a prime contract set aside for small business calls for a combination of supplies and services, the limitations on subcontracting requirement will apply only to subcontracts that correspond to the principal purpose of the prime contract (i.e., either to the services or to the supplies, but not to the total amount of the award for both).
4. Second tier subcontracts will be considered non-similarly situated subcontracts so as to preclude subcontracting beyond the first tier to large businesses in contravention of the purpose of the requirement.
5. The Final Rule clarifies that independent contractors (i.e., 1099 personnel) are considered subcontractors, and may or may not be similarly situated small business subcontractors for purposes of the limitations on subcontracting requirement. Whether 1099 personnel should be considered subcontractors has long confused many contractors.
6. Simplified acquisitions set-aside for small businesses valued between $3,000 and $150,000 will now be exempt from the subcontracting limitation.
The Final Rule also brings other SBA rules into alignment with the updated limitation on subcontracting requirement. In particular, the Final Rule makes two changes to the small business affiliation rules in 13 CFR 121.103 to ensure consistency.
1. The Final Rule redefines affiliation under the ostensible subcontractor rule to exempt similarly situated small businesses. As a result, small business contractors will now be able to rely significantly on similarly situated small business subcontractors without concern that the relationship will create affiliation that compromises their small business size status.
2. The Final Rule broadens the exemptions to affiliation to allow any small businesses to enter into a joint venture for any procurement without becoming affiliated for that procurement due to the joint venture. Previously, only certain types of small businesses and contracts were exempt from a presumption of affiliation when two small businesses enter into a joint venture.
These changes significantly simplify the limitations on subcontracting requirement and will enable better compliance by small business contractors. In addition, small businesses will be able to more freely enter into teams, subcontracts, and joint ventures with other small businesses without compromising their small business status. On balance, these and other changes in the Final Rule should be well received by small business contractors and U.S. Government agencies as well.
The Final Rule makes many other important changes to SBA's regulations governing small business contracting, including for example to the non-manufacturer rule, re-certification requirements, penalties and remedies for non-compliance, and affiliation rules, which deserve careful consideration by all small business contractors. The Final Rule becomes effective on June 30, 2016, but will require changes to the FAR and potentially to current contracts in order to be implemented.