What You Need to Know About New Subcontracting Rules
Wednesday, June 29, 2016
What You Need to Know About New Subcontracting Rules
For nearly a decade WIPP urged Congress to modernize subcontracting rules with two goals in mind: 1) apply a “list us, use us” requirement to ensure WOSB subcontractors are used on a contract, and 2) increase the ability for multiple WOSBs to team on larger contracts. Both were achieved after tireless advocacy in 2013 in a major victory for WIPP.
Those changes, along with many others, have completed the regulatory process at the Small Business Administration (SBA), and pending adopting into the Federal Acquisition Regulation (FAR), will go into effect. In December 2014, SBA proposed a rule to make it easier for small businesses to work with the government and meet subcontracting requirements. WIPP, like many in the contracting community, provided comments
on the draft rule that were incorporated into the final rule
issued on May 31st.
Limitations on Subcontracting
The rule updates the method for calculating limitations on subcontracting (LOS) for set-aside contracts, also known as the 50 percent rule. The new methodology is a simpler calculation based on total contract cost that includes an exemption for amounts spent on “similarly situated entity” subcontractors. This allows for a small business to do less than 50 percent of the work on a contract.
The new rule assists small businesses in complying with LOS by omitting the amount paid to similarly situated entitles, which is defined as a first tier subcontractor that has the same small business program status as the prime contractor and is small for the NAICS code to the subcontract. This is a key change from the proposed rule, which required a similarly situated entity to be small under the NAICS for the prime contract. The distinction is important because it empowers WOSBs to pursue greater subcontracting, as prime contractors determine NAICS codes for subcontracts.
WIPP has supported this change for a number of years, and testified on its value to women business owners. WOSBs working with other WOSBs should increase our capacity to take on larger contracts and innovate in the federal marketplace.
In the final rule, SBA also expressed concern about abuse of this relationship. Specifically, that a similarly situated subcontractor could then subcontract out any amount to a non-qualified large business, circumventing the purpose of the set-aside. To address these concerns, only a first tier subcontractor can count as a similarly situated entity, and that first tier subcontractor must perform the contract work. Additional work performed by lower tier subcontractors will be treated as work by non-similarly situated entities.
The final rule also removed the requirement for a written agreement between a prime contractor and similarly situated subcontractor prior to award, and to require additional reporting to SBA on LOS compliance. WIPP strongly supports this revision, as new reporting systems are compliance burdens small business don’t need.
While SBA intends to pursue a separate rulemaking to explore LOS compliance reporting from all small businesses, existing reporting requirements are sufficient to track and identify subcontracts.
The rule clarifies that agencies should use prior subcontracting plan performance when evaluating a prime contractor’s past performance, and that SBA review of subcontracting plans is supplemental to the contracting agency review. The rule also clarifies that a prime contractor should provide written notice to small subcontractor if listing them in a proposal.
Exemptions for Simplified Acquisition Contracts
Contracts valued between $3,000 and $150,000 are considered “simplified acquisitions” and are automatically set-aside for small business. In this rule, SBA exempts these contracts from both subcontracting limitations and the non-manufacturer rule. WIPP supports these changes, as they provide additional flexibilities for WOSBs to compete in the federal marketplace.
Increased Role for Procurement Center Representatives (PCR)
The rule provides for additional responsibilities for PCRs to review bundled and consolidated contracts and strengthens their role as government-wide small business advocates. These responsibilities should mitigate contract bundling and preserve small business contracts. WIPP has testified on the negative impacts of contract bundling and consolidation on WOSB contracts and is strongly supportive of this change.
Affiliation and Joint Ventures
The rule provides clarity to when presumption of affiliation exists due to existing relationships to include firms owned by married couples, parties to a civil union, parents, and children.
The rule also clarifies that a joint venture (JV) qualifies for a contract so long as each entity in the JV is individually small under the assigned NAICS code for the contract. This new JV rule takes away the guess work in determining if a JV can pursue an opportunity.
Annual Receipts and Recertification
The rule clarifies that all income, including passive income, is included in the calculation of annual receipts to determine size.
The recertification rules are clarified by requiring a firm to recertify following a merger or acquisition of a firm that submitted an offer as small business. The rule also clarifies that if a merger or acquisition occurs after offer an offer is made, but prior to award, the offeror must recertify size directly to the contracting officer. These changes should ensure that small business contracts are awarded to small businesses.
WIPP supports the clarity provided by these provisions.
Size Protest and NAICS Appeals
The rule clarifies what entities are eligible to file a size status protest in the SBA office of Hearings and Appeals, and provides standing to any offeror for consideration of an an award, but not to firms who have been non-responsive, found to be technically unacceptable, or are outside the competitive range.
The rule also allows an SBA Area Director of the Office of Government Contracting to initiate a size determination for WOSB/EDWOSB and Service-Disabled Veteran-Owned businesses. SBA can currently initiate size determinations for all other set-aside groups, and this gives SBA parity in size determinations among the programs.
SBA also sought comments on an appropriate timeline for a NAICS code appeal. While WIPP was supportive of a longer timeline for NAICS code appeals, SBA is not altering timeliness rules for NAICS code appeals at this time.
While this final rule represents a major victory for WOSBs, there are some outstanding questions about how limitations on subcontracting applies to the WOSB program. Because the WOSB program is limited to a specified list of NAICS codes, the rule could be interpreted to only allow subcontracts in those NAICS to qualify under the rule. SBA has clarified that contracts awarded to WOSBs are eligible to take advantage of the new limitations on subcontracting, regardless of whether the NAICS assigned to subcontracts are in the WOSB program.
Without question, these SBA program changes will positively impact WOSBs by providing program flexibility and clarification. While the rule takes effect on June 30th, it may be a bit longer before we see its use. As is typical with changes to SBA regulations, until the FAR is updated to reflect these changes, WOSBs should expect to experience confusion from contracting officers on applying the new SBA policy.