Limitations on Subcontracting – What’s the Latest and Why Isn’t It in My Contract Yet?

October 9, 2017

By Megan C. Connor

Over a year ago, SBA released its final rule implementing changes in how limitations on subcontracting are calculated for set-aside prime contracts. Not a day goes by that we do not field questions from clients as to what these new SBA regulations mean and how to determine compliance. By far, the biggest query we receive is whether SBA’s limitations on subcontracting rules (e.g., 13 C.F.R. § 125.6) are incorporated into a current contract.
 
It is SBA’s position that these new regulations should apply to any set-aside solicitation issued or set-aside contract awarded after June 30, 2016, the effective date of the final rule. Further, because SBA is the agency empowered to administer small business contracting issues, then if there is any conflict in small business issues between the SBA regulations and the FAR, SBA’s regulations should prevail. Therefore, SBA expects small businesses to be in compliance with the new limitations on subcontracting methodology for solicitations and contracts issued after June 30, 2016.
 
The practical dilemma for contractors, however, is that the FAR and, specifically, FAR 52.219-14, is incorporated in their prime contracts, making it a contractual obligation—which begs the question: When will the FAR be updated to align with SBA’s new limitations on subcontracting rules?
 
According to the Open FAR Cases as of October 2, 2017, an interim rule implementing SBA’s changes to limitations on subcontracting has been drafted by the FAR Council, the Civilian Agency Acquisition Council legal team concurs with the draft, and FAR staff are preparing to send the interim rule to the Office of Federal Procurement Policy after receipt of Department of Defense approval to publish. Unfortunately, this status appears to have been unchanged since June 2017, and there is no indication as to when contractors may expect the FAR rule to be published.
 
In the meantime, best practice may be for small business contractors to comply with both the SBA limitations on subcontracting rule and FAR 52.219-14, if possible. If compliance with both is not possible, contractors should be mindful that both GAO and the U.S. Court of Federal Claims have held that when there is a conflict in SBA regulations and the FAR as to a small business issue, SBA’s regulations and interpretation controls over the FAR. See, e.g, Hawpe Constr., Inc., v. United States, 46 Fed. Cl. 571, 581 (2000) (“Conflicts between FAR and SBA regulations should be resolved by looking at the SBA’s latest intent on the issue and by relying on SBA to determine which provision best implements the policies of the agency itself.”); BGI-Fiore JV, LLC, B-409520 (May 29, 2014) (giving deference to SBA’s interpretation of SBA joint venture regulation and FAR 52.219-18).  

PilieroMazza is always willing to answer your questions about limitations on subcontracting and can advise your company to ensure you are in compliance.

About the Author:
Megan Connor, a partner with PilieroMazza, focuses her practice in the areas of government contracts, small business administration programs, business and corporate law, and litigation. She may be reached at 
mconnor@pilieromazza.com.
 
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