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Limitations on subcontracting for prime contractors is an important topic.   Especially now that the Code of Federal Regulations (CFR) and the Federal Acquisition Regulation (FAR) are NOT in agreement.  Let’s get into this topic in more detail, shall we?

Background

In January 2013, the 2013 National Defense Authorization Act (NDAA) became law.  This Act made major changes to the limitations on subcontracting.  The law changes the way the government determined compliance with the limitations on subcontracting for prime contractors.  By the way, limitations on subcontracting applies to service and supply contracts.  The old way was formula based upon “cost of personnel” and “Cost of Manufacturing”, to formulas based on the amount paid by the government.  Most importantly the 2013 NDAA allowed small primes to claim performance credit for “similarly situated entities.”  In essence, this would make it easier for a small prime contractor to meet his self performance  requirement.  A prime contractor could use the work performed by the first tier subcontractor and add it to his self performance to meet the requirement.  

3 1/2 Years Later

Three and a half years after the 2013 NDAA became law, SBA finally published a final rule implementing the changes.   See 13 C.F.R 125.6.  SBA’s regulation took effect on June 30, 2016. The Department of Veteran Affairs declared a Class Deviation incorporating the reference from SBA regulations almost immediately after SBA regulations went into effect.  However, contracting officers from other agencies continue to use the old formulas and did not acknowledge similarly situated entities.  (Note FAR 52.219-14 applies to small businesses and 8(a) contracts.  For HUBZone, , non-VA SDVOSB procurements, and WOSB/EDWOSB contracts the regulation specifies the clauses already.

5 Years Later

On December 4, 2018 the FAR Council finally took the first major step toward implementing the changes.  The FAR Council published a proposed rule in the Federal Register.  As of today 2/17/19 the FAR has not been changed.

The result

As one would expect this led to a ton of confusion.  Which regulation does the prime contractor follow?  SBA regulation?  FAR clause?  Both?  Contracting officers took the position that the FAR clauses take precedence until they’re amended.  However, the CFR takes precedence over the FAR. What if you had a joint venture formed under SBA’s regulation must pledge to comply with 13 CFR125.6. What a mess.

Proposed FAR Changes

What are the changes recommended by the FAR Council?  Instead of a mixture of clauses the FAR Council is recommending consolidating the clauses for all small business programs.  This makes sense.  The proposed rule would also allow prime contractors to use similarly situated entities to meet their performance thresholds.  What does this mean for small businesses?   It means that if you are a small business and you subcontract to another small business first tier subcontractor, you can claim their work performance as part of your performance.  Here is an example, an 8(a) company can subcontract to another 8(a) company and use their subcontract performance to meet your performance expectations.

The proposed rule could change before the final rule based upon public comment.  We will have to wait and see what happens. When will the final rule come out?  I am not sure but you can always do the research yourself.

Hopefully the final rule will resolve the confusion for small businesses.  In the meantime, I would recommend that small businesses read the FAR, CFR and talk to the contracting officer. Remember you must follow what FAR clauses are in your contract.  If you are still confused,  I would suggest that you talk to your attorney and get legal interpretation.

Conclusion

Unfortunately, sometimes the rules are not clear, and you must use your best judgement.  You will find the clauses pertaining to your limitations on subcontracting in your contract.   Always read your contract.  If you have any questions talk to the contracting officer first and if you still are unsure call your attorney.  Remember I am not an attorney and am providing you with the best information that I have.

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