SBA Proposes Rules Affecting Small Business Set Aside Contracts And Subcontracting

On December 29, 2014, the Small Business Administration (SBA) issued proposed rules which, if implemented, will change regulations and implement provisions of the National Defense Authorization Act of 2013 (NDAA), impacting small business subcontracting, joint ventures, affiliation, and set aside contracts. These proposed rules will have significant impact on the operations of small businesses in the federal market. Comments to these rules are to be submitted to SBA by this Friday, February 27, 2015.

Limitations on Subcontracting

Currently, prime contractors are required to perform a certain percentage of work themselves on set aside contracts to comply with limitations on subcontracting requirements. The current rule requires construction contractors to perform at least 15% of the cost of the contract, not including materials, with its own personnel. The proposed rule would limit the percentage of the overall award amount that a prime contractor may spend on its subcontractors. This requirement would, however, exclude any award amount that a prime contractor spends on “similarly situated entity subcontractors,” which are any small business subcontractors that are participants in the same SBA program that qualified the prime contractor as eligible for award of the contract. The prime contractor must identify these similarly situated entities and the percentage of the overall award amount spent on each entity. Further, the prime contractor, along with its similarly situated subcontractors, must still perform a required amount of work on the contract themselves. For consistency with the FAR, the SBA proposes to exempt small business set aside contracts valued between $3,000 and $150,000 from limitation on subcontracting requirements.

The comments to the proposed rule also address the impact of contract modifications on a contractor’s responsibility to comply with the limitations on subcontracting requirement. The rule requires that the prime contractor provide documentation to the contracting officer regarding “how it will continue to satisfy the applicable limitations on subcontracting” if the subcontract value increases through modification(s). This provision may prove to be a challenge especially when the penalty provision is considered.

Under the proposed rule and under the 2013 NDAA, failure to comply with the limitations on subcontracting requirements may result in severe penalties. The statute states that violation of the limitation on subcontracting provision will lead to a penalty of either $500,000 or the amount spent on subcontracting in excess of permitted levels, whichever is greater.

Affiliation

SBA seeks to clarify the kinds of relationships that create a presumption of affiliation and includes firms that conduct business with each other and are owned by married couples, parties to a civil union, parents and children, or siblings. Additionally, SBA is seeking to codify a rule formulated by the SBA Office of Hearings and Appeals whereby affiliation is presumed if a firm derives 70% or more of its revenue from another firm over the course of a fiscal year. This would be a rebuttable presumption allowing start-up firms to avoid a finding of affiliation while it grows a diversified pool of clients. Further, SBA clarifies that the ostensible subcontractor rule, which states that a subcontractor may be deemed a joint venturer and thus affiliated with a prime contractor for size purposes when it performs a majority of a contract, does not apply to similarly situated subcontractors.

Moreover, whereas SBA’s existing rules exclude two small businesses from a finding of affiliation when they enter into a joint venture to perform a small business procurement, the proposed rule allows similarly situated small businesses to joint venture on all types of contracts without being affiliated for size determination purposes.

Adverse Impact and Construction Requirements

SBA conducts an adverse impact analysis for all 8(a) contract awards to determine whether the award will have an adverse impact on small businesses or small business programs unless it is a “new requirement.” The proposed rule defines “new requirement” to include the building of a specific structure but to exclude IDIQ construction projects.

The author of this article is Stephen J. Kelleher, an Associate at the Washington, DC office of the law firm of Smith, Currie & Hancock. He has wide experience in many aspects of government contracting from issues of compliance to a range of federal statutes, small business issues, bid protests and claims litigation. Direct questions on these rules described in this article, or any small business issue, to Kelleher at sjkelleher@smithcurrie.com and 202.452.2140.