Congratulations! Your woman-owned small business (WOSB), Sun Corp, has just been awarded a contract. This particular contract was set aside for WOSBs, meaning only WOSBs may be considered for award. Small Corp is a relatively new company, and you have determined that you will need some help to successfully complete performance of the contract. As luck would have it, you are acquainted with the owner of Moon Corp, and Moon Corp is in the business of doing the exact type of work that Sun Corp needs help with. While diligently reading through the contract prior to its execution, you notice the following language:
What do you do?
Being the responsible business owner you are, you contact your attorney to see what those provisions are all about. After a few questions, your attorney informs you that Moon Corp is considered “other than small.” As such, the provision limits the how much work Sun Corp, as prime contractor, is permitted to outsource to Moon Corp, as subcontractor, while remaining in compliance with the terms of the contract.
This is a situation that is very familiar to federal government contractors. Many businesses that participate in federal government contracting are small businesses and, additionally, often fall under one of a handful of socioeconomic categories recognized by the Small Business Administration (SBA). Small business contractors and contractors within those socioeconomic categories often compete against other similarly situated businesses for federal government contracts that are fully or partially set aside, both broadly, for small businesses in general, and on a more limited basis, for one of the recognized categories. SBA awards these set-asides to small businesses and the various socioeconomic categories to fulfill its goal of bolstering and promoting the economy by providing assistance to small businesses. Frequently, these small businesses also need assistance from other contractors, creating a prime-sub arrangement. In exchange for preferential treatment, small businesses and those in the recognized socioeconomic categories must abide by SBA rules and the FAR, including how much the prime contractor can subcontract. (Please note that this post does not include the exclusion of certain costs or mixed contracts, which will be covered in a later post).
You may be asking “what are the socioeconomic categories” and “how much can Sun Corp subcontract and remain compliant?” Well, I’m here to help you with answers to these two questions, beginning with the easy question first. There are 4 socioeconomic categories recognized by the SBA, along with the general category of small business.
- Women owned small business (WOSB) (such as Sun Corp) and economically disadvantaged women owned small business;
- Service disabled veteran owned small business;
- Historically Underutilized Business Zone (HUBZone) small business; and
- 8(a) Program.
However, for today’s purposes, the more important question is, “how much can Sun Corp subcontract to Moon Corp?” Thankfully, even though there are 4 different socio-economic categories and the general small business category, all are subject to the same general limitations, and those limitations are found at FAR 19.505 and 13 C.F.R. § 125.6.
The first thing that is needed to figure out how much Sun Corp can subcontract to Moon Corp is what type of contract Sun Corp has with Agency. There are 4 types of contracts: services, supplies or products, general construction, and special trades. Prime contractors providing services, not including construction, cannot pay more than 50% of the amount paid by the government to firms that are not similarly situated. 13 C.F.R. § 125.6(a)(1). Prime contractors providing supplies or products are also limited to 50%. 13 C.F.R. § 125.6(a)(2)(i). Prime contractors providing general construction services cannot pay more than 85% of the amount paid by the government to firms that are not similarly situated. 13 C.F.R. § 125.6(a)(3). Prime contractors that are special trade contractors are limited to 75% paid to contractors. 13 C.F.R. § 125.6(a)(4).
So what is this “similarly situated” you speak of? I’m glad you asked! A similarly situated entity is a subcontractor that is the same socio-economic designation as the prime contractor. 13 C.F.R. § 125.1. That means, in our example if Moon Corp was also a WOSB, it would be a similarly situated entity for subcontracting purposes. This is important to know because subcontracting to similarly situated entity does not count towards the subcontracting limits outlined above. 13 C.F.R. § 125.6(c). However, any work that the subcontractor further subcontracts will count towards those limits. Below are a couple hypotheticals for illustration, assuming the services being provided are not construction, and therefore fall under a services category of contract.
Example 1: Sun Corp, a WOSB, enters into an agreement with Moon Corp, an “other than small” business for Moon Corp to provide IT services. Sun Corp cannot pay Moon Corp more than 50% of the amount paid by the government.
Example 2: Sun Corp, a WOSB, enters into an agreement with Moon Corp, also a WOSB, to provide IT services. Sun Corp does not have to limit the amount paid to Moon Corp because they are similarly situated entities.
Example 3: Sun Corp, a WOSB, enters into a subcontract with Moon Corp, also a WOSB, to provide IT services. Moon Corp then subcontracts with Star Corp, an “other than small” business, for Star Corp to develop the platform Moon Corp will use in performing its IT services for Sun Corp. Sun Corp does not have to limit the amount paid to Moon Corp, because they are similarly situated entities, but Star Corp cannot be paid more than 50% of the amount paid by the government to the prime.
Example 4: Sun Corp, a WOSB, enters into an agreement with Moon Corp, also a WOSB, to provide IT services. Moon Corp then subcontracts with Star Corp, also a WOSB, for Star Corp to develop the platform Moon Corp will use in performing its IT services for Sun Corp. Sun Corp does not have to limit the amount paid to Moon Corp, because they are similarly situated entities, but Star Corp still cannot be paid more than 50% of the amount paid by the government because any work that the subcontractor further subcontracts counts towards the limit.
The same method can be used for contracts providing supplies or products, general construction, and special trade contractors by using the applicable percentage. It is important to note that the above information does not apply to partial set asides or mixed contracts that include any combination of services, supplies, or construction, and there are also exclusions from these calculations. I’ll save those for my next post.
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