In March, the Small Business Administration (SBA) extended the comment period to April 6 on its proposed rule implementing provisions of the National Defense Authorization Act of 2013.See 79 FR 77955. The proposed rule, initially published in December 2014, would bring sweeping changes to small business and socioeconomic program performance requirements, including changes to limitations on subcontracting, affiliation and small business joint ventures rules.
While the prime SBA program contractor is still required to perform at least 50% of the work on service and supply contracts, the proposed rule changes the way the performance standard is calculated. The current cost-based analysis looks at the percentage of personnel or manufacturing costs spent by the prime on its personnel, less profit or fees. The new formula simplifies and streamlines the calculation by limiting the small business prime contractor to spend no more than 50% of the total contract award on subcontractors.
However, the proposed rule exempts subcontractors that are “similarly situated entities,” which the proposed rule defines as “a small business concern subcontractor that is a participant of the same SBA program that qualified the prime contractor as an eligible offeror and awardee of the contract.” Essentially, the proposed rule considers any work done by a similarly situated entity not to be subcontracting for compliance purposes, thus those businesses are excluded from the performance limitation.
The proposed rule is designed to curb the practice of qualifying small business, HUBZone SBCs, SDVO SBCs, WOSBs/EDWOSBs and 8(a) SBCs passing on work in excess of these limitations to non-qualifying and ineligible entities for specific types of contracts.
The proposed rule also excludes similarly situated subcontractors from affiliation limitations under the ostensible subcontractor rule, which considers subcontractors who perform most of the primary work a joint venture with the prime and thus affiliated for size determination purposes. The proposed rule also proposes language establishing a presumption of affiliation when firms conduct business with each other and are owned and controlled by people who are married, in civil unions, or immediate relatives. And it establishes that where a firm derives 70% or more of its revenue from another firm in the prior fiscal year, the firm will be considered affiliated. Previously the SBA did not provide a percentage.
The proposed rule also excludes similarly situated entities from being affiliated for small business size determination purposes when performing a procurement as a joint venture. This would expand a benefit currently enjoyed by 8(a) protégé firms to small businesses wanting to pursue small business procurements as joint ventures.
Ultimately, the proposed rule changes are designed to increase participation by similarly situated small business entities in SBA programs by removing limits on their participation on select SBA contracts. They are also intended to clarify and streamline relevant performance measures and calculations to better meet that goal. Absent any additional delay, a final rule should be published sometime this summer. Even if these changes achieve SBA’s goal, it remains to be seen what impact, if any, they have on small businesses passing off too much work to non-qualifying subcontractors and how the new rule will be enforced.