Proposed Rule Would Standardize Subcontracting Limitations

Key Takeaways for Executives

  • New proposed rule will standardize subcontracting limitations across the government.
  • Rule will eliminate confusion, ease compliance burdens and allow more flexibility for small business subcontractors.

A long-delayed proposed rule from the Defense Department, the General Services Administration and NASA would make life easier for small business contractors by standardizing subcontracting limitations across the government.

The proposed rule, issued last month, implements limits established by the 2013 National Defense Authorization Act on the percentage of contract awards that can be spent on subcontractors.

The 2013 NDAA changed the focus of the rules governing limitations on subcontracting. Instead of requiring a percentage of work to be performed by a prime contractor, which was the old standard, the NDAA limited the prime’s subcontracting expenditure to a percentage of the overall award amount.

As a result, “the prime contractor no longer has to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e., contract price) that it spends on subcontractors,” the rule writers said.

Rule ‘Long Overdue’

The Small Business Administration issued a rule in 2016 that implemented this NDAA provision, but other agencies had yet to follow suit. The proposed rule will eliminate resulting confusion, said Devon Hewitt, a partner at Protorae Law.

“This is long overdue,” Hewitt said. The inconsistency between the SBA’s rule and the rest of the government “has caused a real problem in the small business community. A lot of small businesses didn’t know which they had to comply with in order to receive a contract.”

Less Burden, More Flexibility

The rule change also will ease the burden on small business prime contractors in tracking and showing compliance with subcontracting limitations.

“Small businesses primes now can have confidence that they are complying with the rule because they can easily identify the amount they were paid,” Hewitt said.

In addition, the rule states the percentage of the award amount the prime contractor spends on “similarly situated” subcontractors (as defined in the statute) is counted as if it were performed by the prime contractor itself.

According to the rule writers, this change gives small business prime contractors greater flexibility in how they choose to comply with subcontracting limitations.

“Under the current FAR clauses, there is only one way for a small business to comply with the limitations: It must spend the required amount on work performed in-house,” the rule writers explained. “As proposed in this rule, there will be more than one way to comply with the limitations, and the small business will be able to choose how to comply.”

The new subcontracting limitations do not apply set-aside contracts for small businesses of less than $150,000.

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