New Rule Effective June 30 2016 Affects Small Businesses

Posted by David Rose | Jul 06, 2016 | 0 Comments

Limitations on Subcontracting

The Rule excludes from the limitations on subcontracting calculation the percentage of the award amount that the prime contractor spends on similarly situated entity subcontractors. Specifically, the NDAA deems work done by similarly situated entities not to be subcontracted work for purposes of complying with the limitations on subcontracting requirement. 

Address limits based on dollar amount (supply, construction, and specialty trade construction procurements exclude cost of materials)

Mixed type contracts

The CO must first determine which category, services or supplies, has the greatest percentage of the contract value, and then assign the appropriate NAICS code. The corresponding limitations on subcontracting will apply to the contract, depending on whether the CO has selected a supply NAICS code or a services NAICS code. Thus, the statutory authority authorizes that the limitations on subcontracting apply only to that portion of the requirement identified as the primary purpose of the contract. 

Therefore, where a procurement combines supplies and services, the limitations on subcontracting apply only to subcontracts that correspond to the principal purpose of the prime contract. For a contract principally for services, but which also requires supplies, this means that the prime contractor or its similarly situated subcontractors cannot subcontract more than 50 percent of the services to other than small concerns. However, the prime contractor can subcontract all of the supply components to any size business.

Subcontracting Plans

A prime contractor that identifies a small business by name as a subcontractor in a proposal, offer, bid or subcontracting plan must notify those subcontractors in writing prior to identifying the concern in the proposal, bid, offer or subcontracting plan.

(9) Anyone who has a reasonable basis to believe that a prime contractor or a subcontractor may have made a false statement to an employee or representative of the Federal Government, or to an employee or representative of the prime contractor, with respect to subcontracting plans must report the matter to the SBA Office of Inspector General. All other concerns as to whether a prime contractor or subcontractor has complied with SBA regulations or otherwise acted in bad faith may be reported to the Government Contracting Area Office where the firm is headquartered.

 (f)  (1) A prime contractor's performance under its subcontracting plan is evaluated by means of on-site compliance reviews and follow-up reviews, as a supplement to evaluations performed by the contracting agency, either on a contract-by-contract basis or, in the case of contractors having multiple contracts, on an aggregate basis.

(5) Any contractor that fails to comply with paragraph (f)(4) of this section, or any contractor that fails to demonstrate a good-faith effort, as set forth in paragraph (d) of this section:

(i) May be considered for liquidated damages under the procedures in 48 CFR 19.705-7 and the clause at 52.219-16; and

(ii) Shall be in material breach of such contract or subcontract, and such failure to demonstrate good faith must be considered in any past performance evaluation of the contractor. This action shall be considered by the contracting officer upon receipt of a written recommendation to that effect from the CMR. The CMR's recommendation must include a copy of the compliance report and any other relevant correspondence or supporting documentation. Furthermore, if the CMR has a reasonable basis to believe that a contractor has made a false statement to an employee or representative of the Federal Government, or to an employee or representative of the prime contractor, the CMR must report the matter to the SBA Office of Inspector General. All other concerns as to whether a prime contractor or subcontractor has complied with SBA regulations or otherwise acted in bad faith may be reported to the Area Government Contracting Office where the firm is headquartered.

Teaming Arrangement – Credit for Teaming Subcontractors

In the case of a solicitation for a bundled contract, a small business contractor may enter into a Small Business Teaming Arrangement with one or more small business subcontractors and submit an offer as a small business without regard to affiliation, so long as each team member is small for the size standard assigned to the contract or subcontract. The agency shall evaluate the offer in the same manner as other offers with due consideration of the capabilities of the subcontractors.


(1) Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.

SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.

a presumption of affiliation exists for firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings. SBA proposed that the presumption would be a rebuttable presumption.

This presumption may be rebutted by a showing that despite the contractual relations with another concern, the concern at issue is not solely dependent on that other concern, such as where the concern has been in business for a short amount of time and has only been able to secure a limited number of contracts.

Special Rule for Indian Tribes, ANCs, NHOs, CDCs, or by a wholly-owned entity of an Indian Tribe, ANC, NHO, or CDC

A business concern owned and controlled by an Indian Tribe, ANC, NHO, CDC, or by a wholly-owned entity of an Indian Tribe, ANC, NHO, or CDC, is not considered to be affiliated with another concern owned by that entity based solely on the contractual relations between the two concerns.

Joint Ventures

This final rule clarifies that a joint venture of two or more business concerns may submit an offer as a small business for a Federal procurement, subcontract or sale so long as each concern is small under the size standard corresponding to the NAICS code assigned to the contract.

Calculation of Annual Receipts

Receipts include all income, and the only exclusions from income are the ones specifically listed in paragraph13 CFR 121.104(a). SBA has found that some business concerns misinterpreted the current definition of receipts to exclude passive income. SBA's proposed change clarifies the intent to include all income, including passive income, in the calculation of receipts.

When is Size Redetermined

(f) For purposes of architect-engineering, design/build or two-step sealed bidding procurements, a concern must qualify as small as of the date that it certifies that it is small as part of its initial bid or proposal (which may or may not include price).

 (2)(i) In the case of a merger, sale, or acquisition, where contract novation is not required, the contractor must, within 30 days of the transaction becoming final, recertify its small business size status to the procuring agency, or inform the procuring agency that it is other than small.

(D) If the merger, sale or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.

About the Author

David Rose

David A. Rose, Esq., is a senior member of the firm practicing throughout the United States and internationally based in Georgia. In addition to Federal Contracts and Procurement law, he assists companies and corporations with business formation issues (LLCs, Domestic Corporations, Joint Ventures, Teaming Arrangements, 8(a) and Small Disadvantaged Applications to SBA, Mentor Protégé, Affiliation and Ostensible Subcontractor Issues, etc.) and with the establishment of subsidiary entities in foreign locations from the Caribbean to the Mid and Far East. With more than 20 years of experience, the former Deputy General Counsel (Deputy Staff Judge Advocate) of the Air Force Center for Engineering and Environmental Excellence, oversaw the legal program for execution of over $4 Billion in Federal contracts each year. Dave has served at senior positions in Korea, Japan, Germany, Great Britain and the Pentagon and now brings that breadth of knowledge and experience to the commercial sector. His background is complemented by degrees in chemistry, mathematics, a jurisdoctorate, and post doctoral degrees in environmental law and procurement law from George Washington University. He was most recently selected as the 2011 SAME National Industry Small Business Advocate. He is active in the State Bar of Georgia, US Court of Federal Claims, US Tax Court, Armed Services Board of Contract Appeals, Fulton County Bar Association, the Society of American Military Engineers, the American Society of Civil Engineers, and the Judge Advocates Association. He currently holds the active rank of Lt Col in the United States Air Force Reserves and the position of Deputy Staff Judge Advocate (Cat A) to the Headquarters, United States Air Force Reserves where he is one of the primary legal advisers to the Commanding Officer of the Air Force Reserves, Lt General Scobee.


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