Government Contracts Update - June 2016

SBA Issues Final Rule on Limitation on Subcontracting

On May 31, 2016, the SBA issued a long-awaited rule (81 Fed. Reg. 34243) implementing changes to the limitation on subcontracting rule authorized by the 2013 National Defense Authorization Act. The rule also made other important changes applicable to small business and socioeconomic program set-aside contracts. Highlights of the rule include:

Limitation of Subcontracting: A small business set-aside prime contractor cannot subcontract more than fifty percent (50%) of the amount paid by the Government under the prime contract to subcontractors that do not qualify as a “similarly situated entity.” A “similarly situated” entity is a small business subcontractor that is a participant in the same small business program under which the prime contractor receives the award. The new rule allows prime contractors to take credit for work performed by first-tier similarly situated subcontractors and provides opportunities for small businesses to join together in the increasingly competitive set-aside marketplace.

Affiliation: Small business contractors need to be wary of affiliation with other firms if they are to maintain their small business size status. The new rule clarifies the family-relationship and economic-dependence affiliation rules. Separate firms owned or controlled by a spouse or civil-union partner, a parent, a child or a sibling are presumed to be affiliated if they conduct business with each other. The presumption can be overcome by showing a “clear line of fracture” between the concerns.

Expanded Joint Venture Eligibility: The new rule allows small businesses to joint venture without regard to affiliation so long as all joint venture partners qualify as small under the applicable NAICS code. The liberalized rule for small business joint ventures provides another competitive tool for small business contractors.

Subcontracting Plans: A large contractor’s failure to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for its subcontracting plan performance, or its failure to make a good faith effort to comply with the subcontracting plan, will constitute a material breach of contract and be considered in the past performance evaluation of the contractor. These changes are aimed at further assisting small businesses in increasing their share of federal government contract dollars.

The SBA’s new rule will be discussed in more detail at a Kaufman & Canoles Government Contracts Breakfast Seminar (“Small Business Set-Aside Programs”) on June 28, 2016 at the Virginia Peninsula Chamber of Commerce, 21 Enterprise Parkway, Hampton, beginning at 7:30 a.m. Click here to register or contact Andrea King at 757-624-3209 or adking@kaufcan.com with questions.


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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