Limitations on Subcontracting: FAR Revisions May Be Delayed

At least a couple times a month, I’m asked when the FAR’s limitations on subcontracting provisions will be updated to correspond with SBA regulations adopted in 2016, and underlying statutory changes adopted way back in the 2013 National Defense Authorization Act.

Well, now it seems that the FAR updates may take longer than I’d hoped.  In its most recent “Open Cases” update, the FAR Council says that it’s made a switch in the procedure that will be used to implement the changes to the limitations on subcontracting–and that switch will likely delay the implementation of those changes by several months.

By way of quick background, way back in January 2013, President Obama signed the 2013 National Defense Authorization Act into law.  The 2013 NDAA made major changes to the limitations on subcontracting.  The law changed the way that compliance with the limitations on subcontracting is calculated for service and supply contracts–from formulas based on “cost of personnel” and “cost of manufacturing,” to formulas based on the amount paid by the government.  And, importantly, the 2013 NDAA allowed small primes to claim performance credit for “similarly situated entities.”

Interestingly, about a year later–well before either the SBA or the FAR Council had amended the corresponding regulations–the GAO issued a decision suggesting (although not directly holding) that the similarly situated entity concept was currently effective.  But most contractors and contracting officers continued to apply the “old” rules under the FAR and SBA regulations.

On May 31, 2016–about three and a half years after the 2013 NDAA was signed into law–the SBA published a final rule implementing the changes.  The SBA’s regulation took effect on June 30, 2016.  Less than a month later, the VA issued a Class Deviation, incorporating by reference the new SBA regulations for VA SDVOSB and VOSB acquisitions.  But for many other procurements, contracting officers continued to include FAR 52.219-14, which uses the old formulas and makes no mention of similarly situated entities.  (FAR 52.219-14 applies to small business and 8(a) contracts.  For HUBZone, WOSB and non-VA SDVOSB procurements, the subcontracting limits are implemented by other clauses, which use the old formulas but allow the use of similarly situated entities).

This, of course, has led to a lot of confusion.  Does a contractor comply with the SBA regulation?  The FAR clause?  Both?  Some Contracting Officers have taken the position that the FAR clauses govern until they’re amended.  But the SBA, of course, wants contractors to follow the SBA regulations.  Indeed, a joint venture formed under the SBA’s regulations must pledge to comply with 13 C.F.R. 125.6.

Contractors want to comply with the law, but the delay in changing the FAR makes it difficult to determine which law to follow.  I’m often asked when the FAR will be amended to conform with the 2013 NDAA and SBA regulation.  Unfortunately, because of a recent change in the process that the FAR Council will use to update the limitations on subcontracting rules, I’m guessing that the FAR won’t change until sometime in 2019.

The good news is that the FAR Council is working on a rule to amend the FAR.  Until recently, the FAR Council said that, after internal government review, it intended to publish the rule as an “interim final” rule.  An interim final rule becomes effective immediately upon publication.  Usually, the public is invited to comment and the agency then decides whether the interim final rule should be altered.  But the rule is in effect while the public comment period plays out.

In its most recent “Open Cases Report,” issued on June 22, the FAR Council says that the interim final rule was “Converted to proposed rule.”  Unlike an interim final rule, a proposed rule does not take effect when it is issued.  Instead, the agency accepts public comments on the proposed rule, usually for a period of 30 to 60 days, but sometimes significantly longer.  Once public comments are received, the agency reviews the comments and then develops a final rule.  Only after the final rule is published do the changes go into effect.

The bottom line is that using a proposed rule instead of an interim final rule means that it will take significantly longer for the FAR changes to go into effect.  This procedural change will probably add several months to the process.  At this point, my best guess is that the FAR’s limitations on subcontracting provisions won’t take effect until sometime next year.