Changes to the Small Business Act Proposed by the Small Business Administration 12-29-2014

The Small Business Administration (SBA) published its proposed rule to implement provisions of the National Defense Authorization Act of 2013 (NDAA) on December 29, 2014. If passed as proposed, it will alter the method for calculating the limitation on subcontracting rule with regard to small business set-asides.

1. I. LIMITATION ON SUBCONTRACTING

   Currently, the Limitation on Subcontracting a firm is based on the percentage of the cost of the labor or personnel costs of the contract incurred by the small business prime contractor. In the case of a contract for services (except construction), the concern will perform at least 50 percent of the cost of the contract incurred for personnel with its own employees. In the case of a contract for general construction, the concern will perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials). In the case of a contract for construction by special trade contractors, the concern will perform at least 25 percent of the cost of the contract with its own employees (not including the cost of materials). I The changes to the NDAA alter these requirements. The new law would base the requirement by limiting the percentage of the award amount that could be subcontracted. The proposed rule bases the amount that can be contracted on the same percentages, i.e., 50%; 15% and 25%, but redefines the bases on which they are applied to the contract value rather than just the labor dollars. By way of explanation, if a company had a $10 million construction contract, the amount of it that could be subcontracted would be a total of $8.5 Million regardless of the amount of materials or labor that constituted the total contract. SBA looks only to the contract value in determining the amount that can be subcontracted. An excellent proposition that came out of the legislation is one exception "similarly situated" firms. This exception allows a small business prime contractor and any small business teaming partners to combine their contributions of labor, materials and any other participation to meet the limitation and otherwise satisfy the requirement. It was well drafted to work the same whether the set aside is for HUBZone, Service-Disabled, Veteran Owned Small Businesses, Section 8(a), Women-Owned or Economically Disadvantaged Women-Owned small businesses. For example, if a small business with a $10 million supply contract performed $2 .5 million and it had a small business teaming partner that performs $2.5 million, it would meet the limitation and could subcontract the remaining $5 Million to another business wthout danger of running afoul of the rule. The new term coined for this method by the SBA is Small Business Teaming Arrangements (SBTAs). The new rule adds teeth in the enforcement side by adding fines and penalties for violations of the limitations on subcontracting. If a firm uses SBTAs to satisfy the Limitation on Subcontracting a certification must be submitted which is subject to a certificate of competency determination if questioned by the contracting officer.

2. II. JOINT VENTURES

   As it currently works and as the Joint Venture Chart details on our website, you can joint venture between two small businesses when as I jokingly say in my lectures "the moon is full, it's Tuesday and you have two badgers in the back seat." The new rule proposes to eliminate the confusing rule and allow small businesses to compete on any size contract so long as each business is small under the NAICS code assigned to the contract.