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. These changes will impact the regulations at 13 CFR Parts 121, 124, 125, 126, and 127 (small business size regulations, 8(a), government contracting programs, HUBZone, WOSB, respectively).
Any business competing for small business set-asides in the federal arena should take a look, but for easy reference, here’s a snapshot of the most important proposed changes:
Limitations on Subcontracting. While the prime contractor is still required to perform 50% or more of the work under both service and supply contracts, 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 (i.e., others in the same socioeconomic category). 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.
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.
Joint Ventures. The proposed rule would broaden the exclusion from affiliation for small business size status, to allow two or more small businesses to joint venture for any procurement without being affiliated with regards to the performance of that particular procurement. The SBA proposes this in part to encourage joint venturing, which furthers the government-wide goals for small business participation in federal government contracting.
Size Protests. The proposed rule would clarify the regulation that specifies who may initiate a size protests. The current language contains a confusing double negative (“Any offeror that has not been eliminated for reasons not related to size may file a size protest.”). The change will clarify the intent to provide standing to any offeror in line for the award, but not to an offeror that was found non-responsive, technically unacceptable, or outside the competitive range.
Other Changes. The SBA proposes to make changes to other provisions as well, including those concerning the non-manufacturer rule, and North American Industry Classification System Code (NAICS) appeals procedures, and the calculation of annual receipts.
If implemented, over the next few years, these changes will likely impact small businesses doing federal work in one way or another. It is important that these business owners review the changes in order to: 1) comment, if necessary; and 2) understand how legal obligations are affected by the rule changes.
To access the full text of the proposed changes (which includes the commentary and the link to submit your own input), click here. Comments are due on or before February 27, 2015.
Did you find this article informative? If so, sign up for Sarah Schauerte’s weekly blog on issues pertinent to veteran-owned small businesses here. Please remember to click the link sent to your email to activate your subscription!
