It has been a long time coming, but the Department of Defense, in conjunction with the GSA and NASA, are finally issuing a final rule amending the FAR guidance regarding limitations on subcontracting. In this post, we are going to explore just what these changes are and what they mean for government contractors such as yourself. The hope is this brief summary and analysis will provide you some insight as to just what the new rules do.
If you can believe it, this latest rule change is based on regulatory changes made by the SBA all the way back in May of 2016 to implement statutory requirements from the National Defense Authorization Act for Fiscal Year 2013! In fairness, the DoD, GSA, and NASA did propose this rule back in December 2018, although we wonder why it took another two and a half years to reach this point. In any event, this new rule will come into effect on September 10, 2021.
We did discuss this rule earlier, back in December 2018. As we noted then, “The substance of the proposed FAR rule isn’t terribly surprising, nor should it be. Substantively, the rule largely conforms with the SBA’s rule codified in 13 C.F.R. 125.6. Indeed, in its commentary discussing the proposed rule, the FAR Council repeatedly mentions the intent to align the FAR with the SBA’s regulation.” With this new rule, FAR clause 52.219-14, Limitations on Subcontracting, will have the same language as the SBA rule stating that subcontracts to similarly situated entities will not count against the limit on subcontracting. No longer will that clause simply state, for example, that for services, “[a]t least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.” Now it will state, for services, that the prime “will not pay more than 50 percent of the amount paid by the Government for contract performance to subcontractors that are not similarly situated entities.”
In other words, the calculation language for the FAR limitation on subcontracting will now match the SBA rule.
Additionally, FAR 19.001 is changing. The rule finally provides a definition for “similarly situated entities.” Although there was a general understanding of what made an entity “similarly situated”, it lacked an actual definition. The rule will state:
“Similarly situated entity means a first-tier subcontractor, including an independent contractor, that—
(1) Has the same small business program status as that which qualified the prime contractor for the award (e.g., for a small business set-aside contract, any small business concern, without regard to socioeconomic status); and (2) Is considered small for the size standard under the NAICS code the prime contractor assigned to the subcontract.”
In summary, an entity is similarly situated if it has the same sort of SBA classification as the prime contractor and is a small business under the NAICS code of the subcontract. If the prime contractor is an 8(a) certified company and the subcontract is for, let’s say, roofing contractor services, then the subcontractor will have to be an 8(a)-certified company with average annual receipts of less than $16.5 million (assuming that is the size standard applicable to the subcontract). If the contractor is simply a small business with no further statuses, then the subcontractor only needs to be a small business with less than $16.5 million in average annual receipts (or whatever “NAICS code the prime contractor assigned to the subcontract”).
In other words, it is unlikely much will be changed in terms of how SBA will treat these matters, but it cements the long-existing standards into the FAR, which provides some clarity.
For FAR 19.505, on limitations on subcontracting alone, we now have clarification that the 50 percent limitation only applies to the services part of a mixed contract if the contract has a services NAICS code, and only applies to the supplies part of a mixed contract if the contract has a supplies NAICS code. Additionally, the regulation now makes it clear that if similarly situated subcontractors use their own subcontractors, the work the latter is counted towards the limitation on subcontractors, without exception.
In addition, for both the limitations on subcontracting and the nonmanufacturer rule, they are being extended to apply to contracts awarded using the HUBZone price evaluation preference. Additionally, the rules in this regulation are extended to cover set-asides for federal supply schedules for small businesses under FAR 8.405-5 and indefinite-delivery contract orders outside of the fair opportunity process under FAR 16.505. The final rule reflects the clarification that the nonmanufacturer rule and the limitations on subcontracting apply to set-asides and sole source awards made pursuant to subparts 19.8, 19.13, 19.14, and 19.15 of FAR, as well as awards using the HUBZone price evaluation preference pursuant to subpart 19.13, regardless of dollar value.
In any event, we hope this information gives you some sense of what these changes mean. That said, as always, this doesn’t constitute legal advice. If you have any specific concerns regarding compliance with these new rules or how they specifically might apply in a given situation, you should consult an attorney.
Questions about this post? Email us or give us a call at 785-200-8919.