SBA Releases Proposed Rule Implementing Substantial Changes to the Limitations on Subcontracting Restriction

Ogechi C. Achuko, an Associate in Hogan Lovells' Government Contracts Practice, contributed to this post. On December 29, 2014, the Small Business Administration (SBA) released a proposed rule implementing the National Defense Authorization Act (NDAA) of 2013, which reforms numerous aspects of the SBA regulations, including the limitations on subcontracting rule, affiliation principles, and the eligibility of small business joint ventures. Limitations on subcontracting restriction:  The prime contractor is still required to perform 50% or more of the work under both service and supply contracts, but the method of calculating the 50% will change. The proposed rule shifts the formula from a “cost-based” analysis that looks at the percentage of total personnel or manufacturing costs spent on subcontractors, to a “percentage of the total award amount” that is spent on subcontractors. Under the new method, the small business prime may not spend more than 50% of the total award amount on subcontractors that are not similarly situated to the prime. This provision is intended to ensure that the majority of work under a small business set aside contract is performed by a contractor with the applicable size and socioeconomic status, and not passed through to large businesses or ineligible small businesses beyond the applicable limits. Notably, the new rule creates an exclusion from the limitations on subcontracting for “similarly situated entities” which would allow small businesses to satisfy performance requirements by subcontracting to other small businesses that are also participants of the same small business program that qualified the prime contractor to receive the award. However, the “similarly situated entity” subcontractor is subject to the same limitations on subcontracting. Additionally, the proposed rule includes new provisions regarding certification requirements and includes penalties for noncompliance with subcontracting limitations that include imprisonment, civil fines, and suspension and debarment. Affiliation due to identity of interest:  The proposed rule would establish rebuttable presumptions of affiliation based on family relationships and circumstances when a concern derives more than 70% of its revenue from another entity. The proposed rule also adds an affiliation exclusion for a joint venture where each party to the joint venture qualifies as small under the applicable size standard. Other Changes:  The SBA proposes to make changes to regulations concerning the non-manufacturer rule, clarification on who may bring a size status protest, and North American Industry Classification System Code (NAICS) appeals’ procedures. Comments on the proposed rule are due by February 27, 2015.  

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