Is your construction company in compliance with the Small Business Administration’s (“SBA’s”) limitations on subcontracting requirement? Are you positive? If you are a small business general construction contractor and you feel somewhat skittish of these types of questions, you can take some comfort in knowing that you are not alone.

The federal construction industry is undoubtedly popular. However, it is also complicated, particularly when it comes to determining whether your small business is self-performing enough work. Not knowing—at least, not with absolute certainty—whether you have subcontracted out too much work, combined with affiliation worries, makes the federal construction industry challenging and stressful for small business contractors.

Still, there may be some light at the end of the tunnel. As part of the National Defense Authorization Act for Fiscal Year 2013, Congress mandated that the SBA establish an appropriate percentage of the amount paid under construction contracts as the limit for subcontracting. Small business construction contractors should be monitoring when the new self-performance requirements will come into play and plan to help the SBA with its rules.

In their current form, the rules require general construction contractors to self-perform at least 15% of the contract, not including materials. Specialty trade contractors are required to work no less than 25%. While these percentages are low, construction prime contractors still struggle to determine compliance because they frequently must engage multiple subcontractors with various trades and disciplines and, as a result, end up performing only a fraction of the actual construction work.

It is unclear when the SBA will be issuing its proposed rule on the new subcontracting limitations for construction contracts. But when they finally do, the SBA will seek comments from the public—that means you! At that time, small business construction contractors should highlight the seasonal and fluid nature of construction work and other aspects of the industry that pose difficulties in maintaining compliance with the self-performance requirements. For instance, special trade contractors and workers on construction projects often form limited liability companies when, in actuality, they are really just one and two person shops. This creates a challenge for prime contractors seeking to track and report exactly how much work the company is performing on its own, versus that which is being subcontracted out. Whether those “employees” working through separate entities qualify as prime contractor or subcontractor employees requires an analysis of the SBA rules and Internal Revenue Service regulations.

Importantly, the SBA recognizes that subcontractors often perform a majority of the actual construction work. This is taken into account when the SBA analyzes alleged ostensible subcontractor (affiliation) rule violations. This is why a small business prime contractor on a construction contract may delegate a significant portion of the construction work to its subcontractors and not violate the rule, provided the prime contractor retains management of the contract. 

Overall, with the new subcontracting limitations for construction contracts on the horizon, small business contractors should be making their views known to government officials. They should also be working with individuals who are familiar with the SBA’s rulemaking process. And when the SBA finally seeks comments, small businesses must let their voices be heard.

About the author: Peter Ford is an associate with PilieroMazza in the Government Contracts Group. He may be reached at [email protected].