Government Contracts Update - SBA Proposes to Liberalize Subcontracting and Joint Venture Rules on Set-Aside Contracts

At the very end of 2014, the Small Business Administration issued proposed amendments to its existing regulations governing (a) how much of a set-aside contract that a small business may subcontract to other companies and (b) when small businesses may form joint ventures to pursue set-aside work. The new rules are intended to implement changes enacted in the 2013 National Defense Authorization Act.

Subcontracting Limits Liberalized. The SBA’s limitations on subcontracting are intended to protect the integrity of small business set-aside contracts, 8(a) contracts, SDVO SBC contracts, HUBZone contracts and WSOB and EDWSOB contracts by requiring that the eligible prime contractor itself perform a substantial portion of the work awarded under the contract.

The biggest change in the proposed rules is to exclude, in calculating the percentage of work subcontracted by the prime, that portion subcontracted to a “similarly situated entity” (i.e., depending on the type of contract, another small business, another 8(a) concern, another SDVO SBC, another HUBZone concern, or another WOSB or EDWOSB).

The upshot of the proposed new rules would be to reduce the percentage of the work that must be performed by the small-business prime contractor’s own employees as long as one (or more) of the subcontractors is a similarly situated entity.

As an aside, the limiting percentages for subcontract work remain the same but the method of calculating has been somewhat modified.

Excluding amounts subcontracted to “similarly situated entities”, the percentage limitation on subcontracting for both services and supplies is 50% of “the amount paid by the government” to the prime contractor. For construction contracts, the SBA proposes to maintain the current percentages: i.e., no more than 85% of the amount paid by the government to the prime contractor may be subcontracted to firms that are not “similarly situated” in the case of general construction, while the limitation is 75% in the case of any construction contract for a “special trade” contractors.

Joint Ventures on Smaller Procurements. Another important change made by the proposed amended rules would be to permit a joint venture for a small-business (or 8(a), SDVO SBC, HUBZone, WOSB or EDWOSB) set-aside contract as long as each member of the joint venture is small under the size standard corresponding to the NAICS code assigned to the contract. Under the current rules, in addition to the exclusion from affiliation given to an 8(a) protégé firm that joint ventures with its mentor, a joint venture is permitted only if the procurement is bundled or considered large (i.e., a procurement greater than one-half of a NAICS code with a revenue-based standard, or, if the NAICS code assigned to the contract is an employee-based size standard, a procurement greater than $10,000,000).

The SBA justifies proposing to remove this procurement size threshold for permitting joint ventures by asserting that it will help in achieving government-wide small-business contracting goals. Moreover, the change better aligns the joint venture rules with the liberalized limitations on subcontracting discussed above.

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The proposed rules are subject to public comment. We will keep you abreast of developments as the SBA’s proposals make their way through the rule-making process. - Chuck McPhillips


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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