SBA Publishes Final Rule Affecting Contracts and Subcontracting

Posted by David Rose | Jun 07, 2016 | 0 Comments

So the SBA has passed a great deal of new legislation that will again impact how we (federal contractors) do business.

So seeing you are on the edge of your seat, let's take a look at the highlights, shall we?

Limitations on Subcontracting

The NDAA deems work done by similarly situated entities not to be subcontracted work for purposes of complying with the limitations on subcontracting requirement. Thus, work done by a similarly situated entity is counted in determining whether the applicable limitation on subcontracting is met.

What this means is that under the new rule, the NDAA excludes from the limitations on subcontracting calculation the percentage of the award amount that the prime contractor spends on similarly situated entity subcontractors.

A similarly situated entity subcontractor is a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.

So the bottom line is that a prime contractor, for instance an SDVOSB in an SDVO Set Aside contract could subcontract (only to a first tier sub) 10% of the work and it would count as prime contract work, not as subcontracted work. Thus if it was construction, the prime would then only have to perform 5% more of the work to make up the 15% Limitation on Subcontracting.

Bear in mind however, that work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count as subcontracts performed by non-similarly situated concerns.

SBA has decided not to require a written agreement in order for a prime contractor to rely on the work to be performed by similarly situated entities, and practical realities have led SBA to remove the compliance reporting requirement with respect to similarly situated entities

Another change; however, was to create a limit on the percentage of the award amount received by the prime contractor that may be spent on other-than-small subcontractors. The limitation on subcontracting for both services and supplies is statutorily set at 50% of the award amount received by the prime contractor. Remember; however, as noted above, work done by “similarly situated entities” does not count as subcontracted work for purposes of determining compliance with the limitation on subcontracting requirements.

The rule did include the exclusion of “cost of materials” from the limitations on subcontracting for supply, construction, and specialty trade construction procurements in the final rule. So for these type contracts, it is not the total value of the contract but the value after reducing it by the cost of materials.

SBA has inserted a penalty provision and stated I its comments to this final rule, “The penalty provision is statutory and the use of the $500,000 fine as the minimum amount to be applied is also statutory. SBA believes that the penalty provision will deter contractors from agreeing to comply with the limitations on subcontracting without a practical plan for compliance because it provides a strong enforcement mechanism. It is critical that firms that obtain set-aside and preferential contracts comply with applicable subcontracting limitations. The government's policy of promoting contracting opportunities for small and socioeconomically disadvantaged businesses is seriously undermined when firms pass on work in excess of applicable limitations to firms that are other than small or that are not disadvantaged.”

Subcontracting Plans

A contractor that fails to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for its subcontracting plan performance or that fails to make a good faith effort to comply with its subcontracting plan will not only be in material breach of the contract, but such failure shall also be considered in any past performance evaluation of the contractor.

A contracting agency shall also perform evaluations of a prime contractor's subcontracting plan performance, and SBA's evaluations of subcontracting plan performance are to be completed as a supplement to the contracting agency's review.


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.

If a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated. However, this presumption is rebuttable, such as when a firm is new or a start-up and has only received a few contracts or subcontracts. Often new firms will not have as many partners and clients, and therefore will normally be generating more of their revenue from a much smaller number of other companies. Over time these firms should diversify and become less dependent on one entity.

SBA has clarified that SBA will not find affiliation between two concerns owned by an Indian Tribe, ANC, Native Hawaiian Organization (NHO) or Community Development Corporation (CDC) based solely on the contractual relations of the two concerns. The Small Business Act and SBA's rules clearly recognize that ANC, NHO, CDC, and Tribally-owned concerns will provide assistance to sister entities, and it does not make sense to find affiliation based on economic dependence among such concerns.

Joint Ventures

The 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.

In other rules – the Joint Venture Chart is out as of June 30, 2016 – a sad day for Moser Rose - LOL

If you have any questions, I can be contacted by email at [email protected] or by telephone at 229-244-1527.

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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