Blog post written Orest J. Jowyk, Ravenhearth Law, PLLC
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As of June 30, 2016, we are living under new rules issued by the Small Business Administration (“SBA”) regarding limitations on subcontracting, how those limitations are calculated, and how the rules are to be enforced.
Shift From “Percentage of Work” to “Amount Paid”
Those of you with any experience in government contracting are familiar with the old, complex, and often confusing rules on limitations on subcontracting. Under the old rules, generally, SBA required a prime contractor performing a small business set-aside contract to perform a specified percentage of work, usually with its own employees, with some exceptions for certain joint ventures. The new rules change this often difficult to determine “percentage of work” concept to a simple “amount paid” concept. In addition, the new rules allow small business prime contractors to count work performed by “similarly situated” first tier subcontractors as work performed by the prime itself.
“Similarly Situated Entity”
A “similarly situated” entity is a first tier subcontractor that is qualified in the same socio-economic category or program that qualifies the prime contractor for that contract award. For example, a first tier subcontractor that is a participant in SBA’s 8(a) Business Development (“BD”) program can perform work on an 8(a) set-aside prime contract held by another 8(a) BD program participant without that work counting against the “amount paid” limit on subcontracting for the prime contractor.
The first tier subcontractor also must be small for the North American Industry Classification System (“NAICS”) code assigned by the prime contractor to that subcontract (not necessarily the NAICS code assigned by the Government to the prime contract). To fulfill this second requirement, going forward, prime contractors will need to be more conscientious of assigning NAICS codes to subcontracts, which is something many large and small government prime contractors have been lax in doing.
Finally, the new rules will exempt “similarly situated” entities and their prime contractors from affiliation under SBA’s ostensible subcontractor rule, which previously could endanger the small business status of both entities when teaming to perform a contract.
Caution — Harsh Penalties For Violations
The new rules provide for significant penalties for violations. In the past, violations of the limitations on subcontracting rules were rarely if ever punished, even when detected. Under the new rules, potential penalties expressly include administrative remedies, suspension, debarment, fines, and even imprisonment.
Due to inflexibility in the statutory language underlying the new rules, a fine for a violation will be “the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.” There are no exceptions for minimal or unwitting violations.
Except for the harsh fine provision (that likely will lead to SBA using it only in egregious situations), the new rules should ease the burden on small businesses in finding and working with other businesses, and assist many small businesses in the more competitive marketplace on the horizon if newly-proposed “universal” mentor-protégé joint venture rules (a topic for another blog) are promulgated.