FAR Subcontracting Limitation Mishap Proves Costly

“Pop quiz, hot shot.”

Sound familiar?  It’s from the 1994 thriller Speed, in which Dennis Hopper’s deranged character straps a bomb to a passenger bus and rigs the bomb to blow up if the bus’s speed dips below 50 miles per hour.

So why do I bring up one of the few decent movies either Keanu Reeves or Sandra Bullock ever made?  Because today’s edition of SmallGovCon also involves a pop quiz, and here it is: what is the subcontracting limit on a small business set-aside contract for services?  If you answered “50% of the prime contract’s value,” sorry, your bus just blew up.

Contrary to common wisdom, the subcontracting limit for a services contract encompasses only the costs associated with personnel, not the entire cost of the contract.  Confusion over which costs count toward the subcontracting limit can result in the proposal being excluded from the competition, as one contractor recently learned the hard way.

The GAO’s decision in EcoAnalysts, Inc., B-406233, B-406233.2, B-406233.3 (Mar. 19, 2012), involved an EPA small business set-aside procurement for research and related services.  The solicitation included the FAR’s limitation on subcontracting clause, FAR 52.214-19.  That clause, which establishes the 50% subcontracting limit for services contracts, requires that “[a]t least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.”   (The italics are mine).  “Cost of contract performance incurred for personnel,” in turn, means, “[d]irect labor costs and any overhead which has only direct labor as its base, plus the concern’s General and Administrative (G&A) rate multiplied by the labor cost.”

EcoAnalysts, a small business, submitted an offer.  However, EcoAnalysts’ cost proposal indicated that the company would only perform 46.5 % of the cost of the contract incurred for personnel with  its own employees.  Based on the apparent lack of compliance with the subcontracting limitations, the EPA deemed EcoAnalyst’s proposal technically unacceptable.

EcoAnalysts filed a GAO bid protest, alleging, in part, that the EPA had improperly excluded its proposal from the competition because some of EcoAnalysts’ labor costs had been included in its cost proposal as other direct costs, or ODCs.  EcoAnalysts argued that, after including these ODCs, it had proposed to perform at least 50% of the cost of the contract incurred for personnel with its own forces.

The GAO rejected EcoAnalysts’ argument.  Citing the definition of “cost of the contract incurred for personnel,” the GAO wrote, “[t]his definition does not appear to include the consideration of labor costs embedded in ODCs.”  The GAO noted that EcoAnalysts’ ODCs included various non-labor costs, and stated that “[i]n any case, EcoAnalysts provided no information in its proposal as to the personnel costs for its own employees for the laboratory services that would allow the agency to consider them in determining whether that firm would satisfy the subcontracting limitation.”  Thus, the GAO held, the EPA “reasonably disregarded the ODCs in determining EcoAnalyst’s compliance with the subcontracting limitation.”

From the GAO’s decision, it is impossible to tell whether EcoAnalysts’ situation stemmed from an erroneous belief that the subcontracting limits are based on the entire contract value, or whether EcoAnalysts made some other mistake in determining that it would comply with the subcontracting limit.  Regardless of the reason, EcoAnalysts’ failure to demonstrate, on the face of its proposal, that it would comply with the subcontracting limits resulted in its proposal being kicked out of the competition.  In other words, EcoAnalysts’ bus blew up.

3 thoughts on “FAR Subcontracting Limitation Mishap Proves Costly

  1. We are a small business Federal Contractor. My questions are:
    1. Do employees hired through a Temp Agency count toward our company meeting our portion of limits of subcontracting (ie, if we hire them as Temp employees and run their costs through our payroll)
    2. Same question, except we pay the Temp Agency a marked up hourly rate for each employee and they in turn pay the worker (we would make sure the wages they pay their employee working under our supervision meets prevailing wages).
    Thanks.

  2. Hi, Is the subcontracting limitation only applicable for proposals? We see case law stating that actual compliance with the 50% limitation is a matter of contract administration (Coffman). What implications, if any, are there to the prime small biz contractor if their portion of the work falls to just under 50%?

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