If you are a small business government contractor who ever utilizes subcontractors to complete federal set-aside contracts, knowing what a “similarly situated entity” is for a given contract is vital to your success. So, let’s take it back to the basics of “similarly situated entities.”
Even if you are not sure where this term comes from, don’t fret, a great place to start is this other Back to Basics blog on limitations on subcontracting. Because as you guessed it, the term comes from the SBA’s limitations on subcontracting. And since you can read-up on those at the links above, I will keep my explanation of the limitations on subcontracting pretty simple.
For work that the federal government sets aside for any small business concerns–including those in the 8(a) Business Development Program, the Veteran Small Business Certification Programs (SDVOSB/VOSB), the Historically Underutilized Business Zones (HUBZone) Program, or either of the Woman-Owned Small Business Programs (WOSB/EDWOSB)–provided such contract exceeds the simplified acquisition threshold (which is currently $250,000.00 under FAR 2.101), there are limitations on how much the prime can subcontract out to whom.
There are different sections of the SBA rule dedicated to–and thus, different limitations for–the various types of federal contracts as follows:
- A 50% limitation for services contracts and contracts for supplies or products (other than from a nonmanufacturer);
- An 85% limitation for general construction contracts; and
- A 75% limitation for specialty trade contracts.
Note: the Nonmanufacturer Rule may be applied instead to contracts for supplies from a nonmanufacturer, but such is not relevant here; so, check out this other Back to Basics blog on it if you would like more information.
Since all three of the limitations listed above utilize essentially the same language in regard to “similarly situated entities,” we will use services contract limitations to explain it. For those, SBA’s limitations on subcontracting rules state:
(a) General. In order to be awarded a full or partial small business set-aside contract with a value greater than the simplified acquisition threshold (as defined in the FAR at 48 CFR 2.101), an 8(a) contract, an SDVOSB contract, a VOSB contract, a HUBZone contract, or a WOSB or EDWOSB contract pursuant to part 127 of this chapter, a small business concern must agree that:
(1) In the case of a contract for services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded.
In a nutshell, whatever this “similarly situated entity” is can actually help the prime contractor reach its 50% subcontracting limitation on a services contract. So, now we just need to fully understand that term. SBA’s definitions section of its government contracting regulations says the following:
Similarly situated entity means a subcontractor that has the same small business program status as the prime contractor. This means that: For a HUBZone contract, a subcontractor that is a certified HUBZone small business concern; for a small business set-aside, partial set-aside, or reserve, a subcontractor that is a small business concern; for a SDVOSB contract, a subcontractor that is a certified SDVOSB; for a VOSB contract, a subcontractor that is a certified VOSB; for an 8(a) contract, a subcontractor that is a certified 8(a) BD Program Participant; for a WOSB or EDWOSB contract, a subcontractor that is a certified WOSB or EDWOSB. In addition to sharing the same small business program status as the prime contractor, a similarly situated entity must also be small for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform.
Crystal clear right? Ok, if not, I will break it down a bit.
A “similarly situated entity” is a subcontractor that directly qualifies for: (a) the prime contract’s set-aside designation; and (b) the size standard assigned to the NAICS code for that prime contract. It is as simple as that, folks. Yes, by default, if a subcontractor meets (a) and (b) here, it will also have “the same small business program status as the prime contractor.” But again, since that should be inevitable if (a) and (b) are met–assuming the prime contractor was directly eligible for the prime contract’s set-aside and size standard to get the award–I think it is best to focus on (a) and (b).
Here’s an example. Let’s say the government sets aside a contract for event planning services under NAICS code 812990, All Other Personal Services, with a corresponding size standard of $15 million, for the SBA’s SDVOSB Program. The prime contractor who received the award is “Blake Anderson Events, Inc.”–an SDVOSB with $10 million in annual receipts (thus, eligible for the prime contract). Blake Anderson Events, Inc., has two subcontractors for the prime contract: “DeVine Events & Services, LLC,” an SDVOSB with annual receipts of $12 million, and “Anders Activities & Events, Inc.” an SDVOSB with annual receipts of $20 million.
Are these subcontractors “similarly situated entities” for the prime contract? Now, you might be tempted to say, “Yup, they are both SDVOSBs”–and move on. But remember it is a two-pronged qualification. The only “similarly situated entity” here for the prime contract awarded to Blake Anderson Events, Inc., would be DeVine Events & Services, LLC–meeting both the prime contract’s SDVOSB designation and its $15 million size standard (just like Blake Anderson Events, Inc.). Anders Activities & Events, Inc., is considered large under the prime contract’s $15 million size standard–and thus, doesn’t meet both prongs for qualification.
As a quick side note, if you are at all wondering how this is possible, the SDVOSB rules (like some of the other SBA Program rules) allow an SDVOSB to be considered a small business for the purpose of participating in the SDVOSB Program generally if the company “meets the size standard corresponding to any North American Industry Classification System (NAICS) code listed in its SAM profile[.]” But they also note: “At the time of contract offer, a VOSB or SDVOSB must be small within the size standard corresponding to the NAICS code assigned to the contract.” And this second part of the rule is exactly what the two pronged approach to being a “similarly situated entity” is based on. To read up on all the SBA’s Program’s size qualifications, check out this blog.
Finally, what does all this mean for Blake Anderson Events, Inc.?
This simply means that any work Blake Anderson Events, Inc., subcontracts to DeVine Events & Services, LLC, will count toward the 50% minimum for Blake Anderson Events, Inc.’s, limitation on subcontracting for the prime contract here.
But any work Blake Anderson Events, Inc., subcontracts to Anders Activities & Events, Inc., will count against the 50% minimum for Blake Anderson Events, Inc.’s, limitation on subcontracting for the prime contract here–or rather, it will count toward the 50% maximum that can be paid out to subcontractors for the prime contract.
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Understanding and complying with the SBA’s limitations on subcontracting is no easy feat. And the consequences can be dire for noncompliance. So, if you have rule application or compliance concerns, never hesitate to reach out for assistance–you are certainly not alone.
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