On August 11, 2021, the Federal Acquisition Regulatory Council (FAR Council) issued a final rule revising and standardizing the limitations on subcontracting (LOS), including the nonmanufacturer rule, that apply to small business concerns under Federal Acquisition Regulation (FAR) part 19, more closely aligning them with Small Business Administration (SBA) regulations. The final rule becomes effective today, September 10, 2021, and is summarized in more detail below. The FAR Council’s long-awaited LOS rule finally addresses major differences that had existed between SBA’s regulations and the FAR, giving both small business government contractors and contracting officers more clarity on how the rule will be applied.

Limitations on Subcontracting Overview
The limitations on subcontracting rules generally require that small business prime contractors self-perform 50% of supply and service contracts awarded to them, with lower self-performance percentages for different kinds of construction contracts. This requirement is applied to small business set-aside solicitations and contracts through the LOS clause at FAR 52.219-14 and seeks to prevent small businesses from becoming pass-through vehicles for large businesses.

Similarly Situated Entities
The 2013 National Defense Authorization Act (NDAA) created an exception to the LOS for similarly situated entities whereby first-tier subcontracts issued to similarly situated small businesses would count toward the prime contractor’s performance requirement. SBA implemented this exception in its regulations at 13 C.F.R. 125.6 in 2016, but the FAR was not revised to reflect the change until now. This led to confusion about whether subcontracts to similarly situated entities counted against the limitations on subcontracting. The FAR Council’s final rule now revises the FAR in an effort to align with SBA’s treatment of similarly situated entities. 

The final rule also revises the FAR to define a “similarly situated entity” as a first-tier subcontractor that

  1. has the same small business program status as that which qualified the prime contractor for the award, and
  2. is small under the size standard associated with the North American Industry Classification System (NAICS) code that the prime contractor assigned to the subcontract.

The rule clarifies that for a small business set-aside contract, the subcontractor can be any small business concern without regard to whether it shares the prime contractor’s socioeconomic status. The FAR’s revised definition should provide clarity for prime contractors as they calculate their compliance with applicable LOS.

Mixed Contracts
To provide clarification on calculating the 50% limitation for contracts that include both services and supplies (i.e., mixed contracts), the final rule revises paragraph (e)(1) of the clause at FAR 52.219-14 to specify that, when a contract is assigned a NAICS code for services, the 50% limitation only applies to the services portion of the contract under the final rule. The final rule also revises paragraph (e)(2) to specify that when a contract is assigned a NAICS code for supplies, the 50% limitation only applies to the supply portion of the contract.

HUBZone Price Evaluation Preference
The final rule clarifies that the nonmanufacturer and LOS rules apply to solicitations and contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. Specifically, the final rule adds paragraph (e)(2) to FAR 19.507 to clarify that, in solicitations and contracts using the HUBZone price evaluation preference, the contracting officer shall insert the clause at FAR 52.219-14, Limitations on Subcontracting. The final rule also adds paragraph (h)(1)(ii)(B) to specify that the contracting officer shall insert the clause at FAR 52.219-33, Nonmanufacturer Rule, in solicitations and contracts when the HUBZone price evaluation preference is used. For the FAR clauses at 52.219-14 and 52.219-33, the final rule also states that the contracting officer shall not insert the clause in the resultant contract if the prospective contractor waived the use of the price evaluation preference or is “an other than small business.”

Compliance Period
The final rule clarifies the compliance period for the LOS. For a set-aside contract, compliance with the LOS rule is required “by the end of the base term and then by the end of each subsequent option period, or by the end of the performance period for each order issued under the contract, at the contracting officer’s discretion.” For task orders set aside under full and open IDIQ contracts, partial set-aside contracts, or contracts with small business reserves, compliance is required “by the end of the performance period for the order.”

Applicability of the LOS and Nonmanufacturer Rules
The final rule clarifies the applicability of the LOS and nonmanufacturer rules, the latter of which requires prime contractors who are resellers of products (i.e., nonmanufacturers) to provide end products manufactured by small business concerns in order to qualify as a small business for a set-aside contract. In this regard, the final rule explains that the LOS and nonmanufacturer rule clauses do not apply to small business set-aside contracts valued below the simplified acquisition threshold (currently $250,000), but do apply to set-aside and sole-source awards under small business socioeconomic programs regardless of dollar value.

What to Watch
While the final rule aligns many of the FAR’s LOS provisions with SBA regulations, there are still inconsistencies. The Civilian Agency Acquisition Council has already suggested that civilian agencies issue class deviations to account for some of these differences, which we cover here. It remains to be seen whether and when the FAR Council will make additional updates.

For information on the FAR Council’s LOS rule and how it may impact contractual obligations for your business, please contact Christine Fries, the author of this Client Alert, or a member of PilieroMazza’s Government Contracts Group.