One of the most overlooked compliance requirements for set-aside contracts are the limitations on subcontracting. Don’t take my word for it—GAO has noted in several reports that contracting officers generally do not monitor or enforce the requirement that the small business prime contractor must self-perform a certain percentage of the contract.  The limitations on subcontracting requirements are critical to the efficacy of the small business programs.  Indeed, the goals of the programs are not served if small businesses do not perform contracts reserved explicitly for them.  With new SBA rules set to take effect on December 30th, we expect enforcement to be a more significant focus in 2020. As a result, government contractors large and small need to make a New Year’s resolution to adjust or implement compliance strategies to ensure they understand and satisfy the limitations on subcontracting for set-aside projects. 

Highlights from SBA’s new rules include:

  • Contracting officers may request information from small business prime contractors to demonstrate compliance with the limitations on subcontracting.  We have already seen an uptick in solicitations that require the offeror to provide a price breakdown and narrative explanation of how the prime will meet the applicable limitation on subcontracting.  We expect this to increase based on SBA’s new rules.
  • The type of information the contracting officer could request under the new SBA rule includes copies of subcontracts or teaming agreements, a breakdown of the price proposal between the prime and subcontractors, or an email that lists the amount that the prime contractor has paid to its subcontractors and whether those subcontractors are similarly situated.
  • Under SBA’s new rule, a small business may be found ineligible for a set-aside contract if it is unusually reliant on a subcontractor, even if the subcontractor is a small business or if the subcontractor is not a similarly-situated subcontractor (meaning the subcontractor does not have the small business designation required by the prime contract).  However, the prime contractor can rebut this by demonstrating that it, together with any similarly-situated subcontractors, will satisfy the applicable limitation on subcontracting.  This puts greater emphasis on being able to clearly demonstrate at the proposal stage how the prime contractor will satisfy the limitations on subcontracting, as it will be an important tool to defend post-award status protests.
  • When determining compliance with the limitations on subcontracting, SBA’s new rule permits firms to exclude other direct costs to the extent they are not the principal purpose of the contract and small businesses do not provide the service.  Examples include a contract that includes airline travel, or environmental remediation contracts that include a requirement for transportation/disposal work, as none of these services are provided by small businesses.  The new rule also specifically excludes mass media purchases and cloud computing services—again, as long as these services are not the primary purpose of the contract.
  • A prime contractor must stop counting a similarly-situated subcontractor toward the prime’s compliance with the limitations on subcontracting when the subcontractor ceases to qualify as a similarly-situated subcontractor.  Based on this new rule, prime contractors need contractual mechanisms with their subcontractors to ensure they are aware of and can respond accordingly when their subcontractors no longer qualify as similarly situated.

PilieroMazza is working with contractors large and small to adjust compliance strategies going into the New Year, and suggest that all firms working on set-aside contracts should make this a priority in 2020.  The GAO reports, followed by the new SBA rules going into effect at the end of the year, are a harbinger of increased audits and investigations into this issue.  So it’s best to get ahead of this now and avoid a compliance hangover in the New Year.

If you have questions concerning this topic, please contact Jon Williams, the author of this blog, who is a member of the Firm’s Government Contracts and Small Business Programs & Advisory Services practice groups.