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On May 31, 2016 the U.S. Small Business Administration (SBA) issued regulations implementing certain provisions of the National Defense Authorization Act for FY 2013.  One of the key provisions in the new rule addresses “Limitations on Subcontracting.”  Contracting Officers must include FAR 52.219-14, Limitations on Subcontracting, in every contract set-aside for small businesses.  The clause requires the small business prime contract to perform a certain percentage of the prime contract itself.  The FAR clause reflected SBA regulations on the same issue.  These SBA regulations have now been revised per the new SBA rule.  One of the important changes is that the limitations apply to the total amount paid to the small business prime rather than the cost of the contract which had previously been the case.  The limitations on subcontracting are as follows:

  • For services contracts, a small business prime cannot subcontract more than 50% of the total amount paid the small business prime
  • For supply contracts, a small business prime cannot subcontract more than 50% of the total amount paid the small business prime, excluding the cost of materials
  • For construction contracts, a small business prime cannot subcontract more than 85% of the total amount paid the small business prime, excluding the cost of materials
  • For contracts involving special trades, a small business prime cannot subcontract more than 75% of the total amount paid the small business prime, excluding the cost of materials

The most significant change to SBA’s existing limitations on subcontracting rules is the manner in which these rules will be applied.  The new rule states that “similarly situated entities” who receive work from a small business prime will not be considered a subcontractor for purposes of the new limitations on subcontracting rule.  Stated another way, the amount subcontracted to a “similarly situated entity” is considered part of the work performed by the prime, not work that is subcontracted.  A “similarly situated entity” is a business that is small under the NAICS code assigned the subcontract and which has the same small business program status as the prime contractor.  For example, in a procurement set aside for HUBZones, the “similarly situated entity” must also be a HUBZone in order to be exempt from the limitations on subcontracting rule.  In addition, the “similarly situated entity” has to perform the work with its own employees.  Independent contractors are considered subcontractors for purposes of the rule and can qualify as “similarly situated entities” as long as they meet the definition.

Contractors should be aware that these changes apply only to SBA’s rules regarding limitations on subcontracting.  Presumably, the FAR will adopt these changes and issued a new FAR clause on Limitations on Subcontracting.  Until such time, it is unclear which rule will apply, the one stated in the FAR clause that reflected the old regulations, or the new regulations described above.