8(a) Contractor Terminated For Subcontracting Limit Violations

A contractor was recently terminated from the SBA’s 8(a) Program for failing to comply with the subcontracting limits applicable to its 8(a) contracts.

The SBA Office of Hearings and Appeals upheld the termination, writing that the SBA had properly terminated the 8(a) contractor for “willfully violating SBA regulations.”  SBA OHA rejected the contractor’s argument that it was exempt from the subcontracting limits under the so-called non-manufacturer rule.

SBA OHA’s decision in Reality Technologies, Inc., SBA No. BDPT-488 (2013) involved the SBA’s termination of Reality Technologies, Inc. from the 8(a) Program.   The SBA terminated Reality, in part, based on the conclusion that Reality had violated the applicable subcontracting limitations under several 8(a) contracts.  The SBA found that Reality had failed to perform at least 50% of the labor costs under 8(a) services contracts.

Reality appealed its 8(a) termination to SBA OHA.  Reality argued that the limitations on subcontracting did not apply to its 8(a) contracts because those contracts were for supplies, not services.  Reality argued that it had complied with the non-manufacturer rule, which governs small business status under such contracts.

SBA OHA disagreed with Reality.  It wrote that many of the 8(a) contracts in question were assigned NAICS code 541519 (Other Computer Related Services), which falls under NAICS Sector 54 (Professional, Scientific, and Technical Services).  SBA OHA concluded that because the procuring agencies had assigned services-based NAICS codes to the 8(a) contracts in question, these contracts were services contracts, and Reality was required to comply with the 50% subcontracting limit.

SBA OHA wrote that even if the contracts had been supply contracts, Reality had not demonstrated that it had complied with the non-manufacturer rule because it was not aware of whether its manufacturer was a domestic small business.  Because “Reality cannot attest to complying” with the non-manufacturer rule, it could not rely on that rule to qualify as a small business.

The Reality Technologies illustrates the critical importance of complying with the limitations on subcontracting in the performance of 8(a) contracts.  As the case demonstrates, the SBA can terminate a contractor from the 8(a) program for subcontracting limit violations.

Reality Technologies should also serve as a warning to companies that rely on the non-manufacturer rule to exempt them from applicable subcontracting limits.  As the case shows, the non-manufacturer rule does not apply to all contracts–and even if it does, the contractor relying on the rule must obtain the supplies from a domestic small business (unless a waiver has been issued).

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