Limitations on Subcontracting Clause Allows Small Business Subcontractors, Says GAO

The FAR’s limitations on subcontracting clause allows the prime contractor to count small business subcontractors toward the prime’s own performance requirement, according to the GAO.

In a recent bid protest decision, the GAO confirmed that the National Defense Authorization Act of 2013 permits prime contractors to meet the requirements of the limitations on subcontracting clause by including work performed by “similarly situated” subcontractors.

The GAO’s decision in Sealift, Inc., B-409001 (Jan. 6, 2014) involved a Navy procurement for the charter of a shallow draft tanker.  The solicitation was issued as a small business set-aside.

After evaluating competitive proposals, the Navy awarded the contract to Schuyler Line Navigation Company, LLC.  Sealift, Inc., an unsuccessful competitor, filed a GAO bid protest.  Sealift argued, in part, that Schuyler would not comply with the limitation on subcontracting clause.  Sealift alleged that the majority of the crew on Schuyler’s vessel would be employed by Schuyler’s subcontractor, Patriot Contract Services.

The GAO found that there was nothing in Schuyler’s proposal or elsewhere in the record to indicate that Schuyler would not comply with the limitations on subcontracting clause.  To the contrary, Schuyler had affirmatively provided assurances that it would comply.

The GAO then noted that Patriot was a small business.  The GAO wrote that the 2013 NDAA allowed Schuyler to count Patriot’s costs as its own for purposes of determining compliance with the limitations on subcontracting clause:

We note that the National Defense Authorization Act for Fiscal Year 2013–passed several months prior to the award in this procurement–amended the Small Business Act to provide that, for purposes of the limitations on subcontracting, costs incurred by a small business prime contractor on its “similarly situated” small business subcontractor shall not be considered subcontracted costs . . .  Accordingly, under this framework, the costs incurred by Schuyler’s small business partner, Patriot, would not be considered subcontracted for purposes of the limitation on subcontracting.

The GAO’s comment suggests that, in the GAO’s eyes, small businesses need not wait for an amendment to the FAR in order to begin taking advantage of the “similarly situated entity” exception  set forth in the NDAA.  This is welcome news for small businesses, which may find it much easier to comply with the limitations on subcontracting by relying in part on one or more small business subcontractors.

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