United States: The SBA Gets Down To (Small) Business: Venable's 5-Part Series On The SBA's Proposed Rules To Implement The 2013 NDAA

Last Updated: January 27 2015
Article by Keir X. Bancroft and Nathaniel S. Canfield

On December 29, the Small Business Administration (SBA) published substantial new proposed rules to implement requirements under the 2013 National Defense Authorization Act (NDAA), addressing a wide variety of issues affecting not just small business government contractors, but also large business government contractors that subcontract with small businesses. This week, Venable's Government Contracts Practice Group will examine the most significant changes that the SBA has proposed in a 5-part series, offering insights and take-aways for small and large businesses that could be affected by these proposed rule changes. Our installments will cover the following aspects:

  1. The Limitation on Subcontracting and Small Business Subcontracting Plans
  2. Identity of Interest, Size Protests, NAICS Appeals, and Certificates of Competency
  3. Calculation of Annual Receipts, Recertification Requirements, and Service-Disabled Veteran-Owned and HUBZone Small Business Concerns
  4. Affiliation Rules, Joint Ventures, and the SBIR and STTR Programs
  5. Changes to the Nonmanufacturer Rule

Government contractors both large and small will want to consider these topics and determine if they want to submit comments in advance of the February 27, 2015 deadline.

The Proposed New Limitation on Subcontracting, or 50% Rule

The current limitation on subcontracting rule, or "50% rule," requires small business prime contractors on set-aside services contracts to incur no less than 50% of the cost of performance for labor. A similar methodology applies to materials and construction contracting. To implement requirements of the 2013 NDAA, the SBA proposes to alter the rule as follows:

No more than 50% of the amount paid by the government to the prime may be paid to firms, at any tier, that are not similarly situated, and in addition

  • Any work that a similarly situated entity subcontractor further subcontracts to an entity that is not similarly situated will count toward the 50% subcontract amount.
  • A similar 50% limitation applies to the amount paid by the government for supply contracts; a 15% limitation is applied to the amount paid by the government for construction contracts, and a 25% limitation is applied to the amount paid by the government for specialty trade contractors.

Accordingly, under the new rule a small business prime is barred from subcontracting more than 50% of the amount paid by the government under the prime contract, unless a subcontract is to a similarly situated entity, i.e., a subcontractor with the same small business program status as the prime contractor. Thus, a HUBZone small business prime contractor can subcontract to another HUBZone small business subcontractor without it counting toward the 50% limitation. That HUBZone small business prime contractor, however, will have to count a subcontract to a woman-owned small business toward the 50% limitation, because it is not a similarly situated entity.

The SBA has gone a step further from Congress. The 2013 NDAA focused only on prime contractor restrictions. This limitation, however, could allow a similarly situated subcontractor – to which the 50% limitation does not count – to further subcontract some or all of the value of its contract to a large business. Thus, on a $100,000 set-aside, a HUBZone small business prime contractor could subcontract $75,000 of the amount paid by the government to another HUBZone small business. That subcontractor, in turn, could subcontract some – or all – of its subcontract to a large business. The SBA proposes to block that loophole by imposing limitations to contractors at any tier, and specifies that subcontracts to entities that are not similarly situated will count toward the rule's limitations. This would bar the HUBZone small business subcontractor in the example above from subcontracting too much work to a large business subcontractor.

The wording of the proposed new rules also would dramatically simplify the methodology for determining how the percentage of subcontracting is calculated. For both services and supplies, the percentage is calculated simply as a percentage of the amount paid by the government to the prime. This is a substantial change from the current calculation methodology, as services contractors who have spent time and effort determining the "cost of contract performance incurred for personnel" will attest.

The SBA has proposed significant penalties for small business prime contractors that misrepresent compliance with the rule. Those penalties include imprisonment for up to 10 years, and a fine that is the greater of $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.

The Bottom Line: What You Should Know

Under the SBA's proposed rule, small business primes must be vigilant in tracking the amount of work subcontracted throughout their subcontracting chain, particularly the work subcontracted by similarly situated entities. Failure to keep track of subcontracting could result in the contracting team exceeding the 50% limitation on subcontracting without the prime contractor's knowledge, and risk an accusation that the prime misrepresented compliance with the rule.

Small Business Subcontracting Plan Requirements

The SBA proposes to toughen up requirements pertaining to small business subcontracting plans, which could have significant consequences for large business prime contractors.

  • Reporting Fraudulent Activity or Bad Faith: The SBA proposes to allow small business concerns and commercial market representatives (CMRs) to report fraudulent activity or bad faith behavior by large business prime contractors with respect to their subcontracting plans. Reports would be made to the SBA's Area Office where the firm is headquartered.
  • Strengthening Corrective Action Plans: Large business prime contractors failing to provide a written corrective action plan after receiving a marginal or unsatisfactory rating for their subcontracting plans will be subject to material breach of contract, which will be considered in the contractor's past performance evaluation.
  • Data Collection and Reporting: The SBA proposes to require agencies to collect, report, and review data on the extent to which each contractor meets its goals and objectives as set out in subcontracting plans.

This proposed rule, coupled with the recent rule allowing small business subcontractors to communicate directly with contracting officers about a lack of payment, will affect how large business prime contractors and their small business subcontractors interact. Failure by a large business prime contractor to reconsider a strained relationship with a small business subcontractor could lead to an allegation of fraudulent activity or bad faith with respect to small business subcontracting plan compliance. This proposal by the SBA leaves no recourse for the prime contractor to respond to allegations of fraudulent activity or bad faith, which could have significant adverse effects for contractors.

The Bottom Line: What You Should Know

Under the SBA's proposed rule, large businesses must be aware of increasing scrutiny about small business subcontracting. The SBA's proposed rule does not specify that any of the data collected on its subcontracting plan will be limited. Therefore, representations as to plan compliance under one contract must be consistent with plan compliance under another contract, or a large business prime runs the risk of allegations of making false statements to its agency customers.

Submitting Comments

Contractors wishing to submit comments on these proposed rules can do so through regulations.gov by searching for RIN: 3245-AG58. Comments are due by February 27, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions