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Congress Enacts Major Changes Regarding Limitations on Subcontracting




by:
Edward T. DeLisle
Maria L. Panichelli
Cohen Seglias Pallas Greenhall & Furman PC - Philadelphia Office

 
February 12, 2013

Previously published on February 11, 2013

On January 3, President Obama signed into law the 2013 National Defense Authorization Act (“NDAA” or “the Act”).   The Act seeks to change a number of acquisition provisions applicable to contractors doing business with the federal government.

One important change involves the limitation on subcontracting rules relating to small businesses.  The NDAA calls for changes to those rules when it comes to supply and service contracts.  Moreover, while the NDAA does not seek to change the current limitations on small business subcontracting in the construction context, its implementing regulations will add new provisions, applicable to all government contracts, which could make it easier for all small business contractors to issue subcontracts.

Under the NDAA, a small business contractor in the service context “may not expend on subcontractors more than 50 percent of the amount paid to the concern under the contract.”  The current rule, as set forth at 13 C.F.R. § 125.6(a)(1), provided that “the [small business] concern will perform at least 50 percent of the cost of the contract incurred for personnel with its own employees.”  The key distinction is the modification of the way in which costs are calculated.  Currently, only personnel costs matter; 50% of the personnel costs must be borne by the small business prime.  Once the regulations implementing the NDAA are enacted, the rule will be modified to reflect “total cost."  Small business contractors will have to perform 50 percent of the total cost themselves.

Supply contracts will change in a similar manner.  Currently, a small business supplier to the government  must perform at least 50 percent of the cost of manufacturing its supplies or products, not including the cost of materials.  13 C.F.R. § 125.6(a)(2).  The new rule will provide that a small business contractor cannot expend more than 50 percent of the amount paid to it by the government (less the cost of materials).

The NDAA does not alter the limitations on subcontracting already in place for general or specialty construction.  A small business prime contractor will still be required to perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials) in the context of general construction. 13 C.F.R. § 125.6(a)(3).  In the case of specialty trade contractors, a small business prime must still perform at least 25 percent of the cost of the contract with its own employees (not including the costs of materials). 13 C.F.R. § 125.6(a)(4). 

Despite the above, the NDAA seeks to add an entirely new provision, applicable to all small business contracts, which may allow a small business construction contractor to exceed the regulatory subcontracting limits.  Apparently fearing that certain small contractors would be adversely affected by the new rules concerning self-performance, Congress included a provision pertaining to “similarly situated entities."  Under this provision, a small business prime contractor may be able to satisfy its own performance requirements through subcontracting if the subcontractor is, itself, a small company. 

This provision could cause big changes in the way small contractors do business.  Because the NDAA left the specific details concerning this provision to the SBA, much will depend on the specific nature of the implementing regulations, so stay tuned.  Those regulations should be in place later this year.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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