Subcontracting is a hot topic in the federal government contracting world. Large businesses placing bids on federal procurements are often required to have a small business subcontracting plan, while small businesses are limited to exactly how much work they can subcontract out. The FAR and SBA rules contain the details relevant to small businesses’ limitations on subcontracting. These regulations are, in general, pretty straightforward. Well, at least when it comes to total small business set asides for one specific type of work. Further, there are a ton of resources available to help small business federal contractors understand these limits. Just googling “limitations on subcontracting” comes up with webinars, blogs, federal government sites, and even YouTube videos on the topic, but most only focus on the more general limitations. There aren’t nearly as many resources that take on the topic of partial set asides, but these limitations are important as well. In this post, I am going to walk you through how these limitations apply to partial set asides to show that contracts partially set aside for small businesses are not nearly as intimidating as they may seem.
Partial Set Asides
Partial set asides are essentially exactly what it sounds like: Federal Government contracts in which part, but not all, of the services, supplies, or construction will be performed solely by a small business or a specific category of small business. For a full rundown of when a partial set aside is permitted, look no further than FAR 19.502-3. Here is SBA’s definition:
means, for a Multiple Award Contract, a contracting vehicle that can be used when: market research indicates that a total set-aside is not appropriate; the procurement can be broken up into smaller discrete portions or discrete categories such as by Contract Line Items, Special Item Numbers, Sectors or Functional Areas or other equivalent; and two or more small business concerns, 8(a) BD Participants, HUBZone SBCs, SDVO SBCs, WOSBs or EDWOSBs are expected to submit an offer on the set-aside part or parts of the requirement at a fair market price.
Partial set-aside (or partially set-aside) means, for a Multiple Award Contract, a contracting vehicle that can be used when: market research indicates that a total set-aside is not appropriate; the procurement can be broken up into smaller discrete portions or discrete categories such as by Contract Line Items, Special Item Numbers, Sectors or Functional Areas or other equivalent; and two or more small business concerns, 8(a) BD Participants, HUBZone SBCs, SDVO SBCs, WOSBs or EDWOSBs are expected to submit an offer on the set-aside part or parts of the requirement at a fair market price.
For today’s purpose, it is less important to know in what circumstances a partial set aside is permitted, and more important to know what limitations apply. Thankfully, the same rules found in 13 C.F.R. § 125.6 and FAR 19.505 that apply to contracts that are completely set aside for one category of small business or another, such as 8(a) or woman owned small businesses, also apply to contracts that are partially set aside. In such a situation, the limitations of subcontracting will apply only to the portion of the procurement set aside for small businesses.
Application
The National Park Service (NPS) is in the process of planning a Fourth of July extravaganza held annually at a national park. To fulfill its needs, NPS knows it needs two different contract line items (CLIN): CLIN 1 and CLIN 2. CLIN 1 is set aside for small businesses, but CLIN 2 is something that can only be procured from a large business. NPS needs 500 units of CLIN 1 and 500 units of CLIN 2. Because NPS cannot get all of the CLINs from a small business, NPS makes the decision to procure CLIN 2 from a large business and the request is approved. NPS then awards the contract for 500 of CLIN 1 to Small Business (SB), and the contract for 500 of CLIN 2 to Large Business (LB).
Importantly, a “business concern will not have to comply with the limitations on subcontracting (see § 125.6) and the nonmanufacturer rule for any order issued against the Multiple Award Contract if the order is competed and awarded under the portion of the contract that is not set-aside.” 13 C.F.R. § 125.2.
Now, the language of 13 C.F.R. § 125.6 states that a small business must agree that, “it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated” for services and supplies. Note that this number goes up to a maximum of 75% for specialty construction contractors, and 85% for general construction contractors. Therefore, it is important to know the value of the contract to determine whether SB is compliant with the limitation. Here, CLIN 1, which is awarded to SB is worth $50,000, and CLIN 2, which is awarded to LB is worth $50,000. This makes the total contract value $100,000. SB is able to provide 80% of CLIN 1, or 40% of the overall value of the solicitation, but needs to subcontract the remaining 20% of CLIN 1, or 10% of the overall value of the solicitation to an “other than small business” (OTSB).
If SB subcontracts 20% of CLIN 1 from OTSB, is SB in compliance with the limitations on subcontracting?
The answer to this question is yes. SB will remain in compliance with the limitations on subcontracting if it subcontracts 20% of CLIN 1, or 10% of the overall solicitation, to OTSB.
Remember, the contract for 500 units of CLIN 1 was set aside for small businesses. SB is only subcontracting with OTSB so that it may provide all 500 of CLIN 1. Because the cost for SB to subcontract the additional 20% of CLIN 1 needed was $10,000, or 20% of the overall set aside value of $50,000, SB did not “pay more than 50% of the amount paid by the government to it to firms that are not similarly situated.” Therefore, the small business is in compliance with the limitations on subcontracting and can now provide all 500 of CLIN 1 to NPS.
You may be wondering, “how are the limitations on subcontracting met if 60% of the value of the solicitation is paid to businesses that do not qualify as small?” Remember, in the situation of a partial small business set aside, the limitation on subcontracting only applies to the portion of the solicitation that is set aside for small businesses.
As you can see, the limitations on subcontracting that apply to contracts partially set aside for small businesses are only slightly more difficult than a total set aside. The calculation is done the same way. The only difference is that the limitation is only applicable to the small business’s contract.
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