Limitations On Subcontracting: FAR Change In The Works

It’s been more than a year since the SBA issued a final rule overhauling the limitations on subcontracting for small business contracts.  The SBA’s rule, now codified at 13 C.F.R. 125.6, changes the formulas for calculating compliance with the limitations on subcontracting, and allows small businesses to take credit for work performed by similarly situated subcontractors.

But the FAR’s corresponding clauses have yet to be changed, and this has led to a lot of confusion about which rule applies–especially since many contracting officers abide by the legally-dubious proposition that “if it ain’t in the FAR, it doesn’t count.”  Now, finally, there is some good news: the FAR Council is moving forward with a proposed rule to align the FAR with the SBA’s regulations.

By way of quick background, way back in January 2013, former President Obama signed the 2013 National Defense Authorization Act into law.  The 2013 NDAA made major changes to the limitations on subcontracting.  The law changed the way that compliance with the limitations on subcontracting is calculated for service and supply contracts–from formulas based on “cost of personnel” and “cost of manufacturing,” to formulas based on the amount paid by the government.  And, importantly, the 2013 NDAA allowed small primes to claim performance credit for “similarly situated entities.”

Interestingly, about a year later–well before either the SBA or the FAR Council had amended the corresponding regulations–the GAO issued a decision suggesting (although not directly holding) that the similarly situated entity concept was currently effective.  But most contractors and contracting officers continued to apply the “old” rules under the FAR and SBA regulations.

On May 31, 2016–about three and a half years after the 2013 NDAA was signed into law–the SBA published a final rule implementing the changes.  The SBA’s regulation took effect on June 30, 2016.  Less than a month later, the VA issued a Class Deviation, incorporating by reference the new SBA regulations for VA SDVOSB and VOSB acquisitions.  But for many other procurements, contracting officers continued to include FAR 52.219-14, which uses the old formulas and makes no mention of similarly situated entities.  (FAR 52.219-14 applies to small business, 8(a) and WOSB contracts.  For HUBZone and non-VA SDVOSB procurements, the subcontracting limits are implemented by other clauses, which use the old formulas but allow the use of similarly situated entities).

This, of course, has led to a lot of confusion.  Does a contractor comply with the SBA regulation?  The FAR clause?  Both?  Some contracting officers have taken the position that the FAR clauses govern until they’re amended.  But the SBA, of course, wants contractors to follow the SBA regulations.  Indeed, a joint venture formed under the SBA’s regulations must pledge to comply with 13 C.F.R. 125.6.  It’s a mess.

Now, it seems, the FAR Council seems to be making progress on eliminating the FAR/SBA discrepancy.  (The FAR Council is a shorthand term for the body of defense and civilian agency representatives who propose and implement changes to the FAR.  If you’re interested in how this works, FAR 1.2 is chock full of fun and exciting details).

In its most recent list of “Open FAR Cases,” published on June 9, 2017, the FAR Council says that it is working on a “Revision of Limitations on Subcontracting.”  Specifically, the new FAR rule “[i]mplements SBA’s final rule” from last year, and “[a]lso implements SBA’s regulatory clarifications concerning the application of the limitations on subcontracting, nonmanufacturer rule, and size determination of joint ventures.”

As of June 5, the CAAC–that’s the civilian side–has concurred “with draft interim FAR rule.”  FAR Council staff are “preparing to send to OFPP after DoD approval to publish.”

This is important news for a couple reasons.  First, this means that the draft rule is well along in the process.  Review by the Office of Federal Procurement Policy is one of the final steps before a rule or proposed rule is published in the Federal Register.  Second, it appears that the FAR Council intends to adopt an interim rule, rather than a proposed rule.  An interim rule takes effect immediately (or very soon) after publication, and then can be adjusted after receipt of public comments.  A proposed rule, on the other hand, doesn’t take effect until public comment is received and a final rule is published.  In other words, if the FAR Council uses an interim rule, the changes will take effect a lot sooner.

It likely will still be a few months until an interim rule is published, but it appears that an end to the confusion is on the horizon.  Stay tuned.