In response to widespread interest in allowing more small business participation in opportunities involving cloud computing, the Small Business Administration ("SBA") has decided to exclude cloud computing from the limitation on subcontracting rule calculation, in certain circumstances. Thus, beginning December 30, 2019, small businesses are no longer limited in their ability to subcontract out cloud computing services to larger companies, in connection with performing a Government contract set aside for small businesses, where the small business will perform other services that are the primary purpose of the acquisition.
The limitation on subcontracting rule provides that a small business may not subcontract more than 50% of the prime contract amount, under a services contract, to businesses that are other than small. 13 C.F.R. 125.6; 48 C.F.R. 52.219-14. In the cloud computing context, this limitation has had the effect of reducing small business participation in IT service contracts with a substantial cloud computing component. Typically, a small business is not able to commit to a procurement in which it (together with other small businesses, if needed) will provide more than 50% of the services under these contracts. Certainly not where the cloud computing market is currently dominated by juggernauts who are far larger than "small."
The final rule, published on November 29, 2019, implements a proposed rule from December 4, 2018, discussed in an earlier blog post here, which is designed to eliminate this problem for small businesses.1
What Does This Mean For Your Company?
As of December 30, 2019, your small business can engage subcontractors that are other than small businesses to perform substantial cloud computing services in connection with performing Government contracts that have otherwise been set aside for small businesses.
Bear in mind, however, this rule does not allow your company to enter into a Government contract for which the "primary purpose" is cloud computing services and have a larger company perform the work. The amended rule only allows small businesses to subcontract cloud computing work if other, non-cloud computing services are the primary purpose of the set aside contract. Note that while "primary purpose" is not defined, we believe it will be interpreted to allow broad opportunities for small business subcontracting, as the final rule acknowledges "where cloud computing itself is the primary purpose of the acquisition...such a procurement should not be set aside or reserved for small businesses."
The new rule is a welcome change for small businesses, providing more flexibility to secure IT contracts with the Government, while still taking advantage of small business set aside opportunities.
1 Note the proposed rule suggested a possible recharacterization of cloud as a "product" rather than a "service" for purposes of applying waivers to the non-manufacturer rule, but it appears SBA opted for the alternative approach in its final rule.
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