Government Contracts

The National Defense Authorization Act of 2013 changed the way that limitations on subcontracting are calculated. This is applicable to Small Businesses who hold prime contracts with the U.S. Government and subcontract portions of the work under their contract to large businesses. The old rule required the prime contractor to perform “at least 50 percent of the cost of contract performance incurred for personnel” on services contracts or “at least 50 percent of the cost of manufacturing the supplies (not including the cost of materials)” on supply contracts.

The new rule for service contracts says that the prime “may not expend on subcontractors more than 50 percent of the amount paid to the [prime] under the contract.” (emphasis added). For supply contracts, the prime “may not expend on subcontractors more than 50 percent of the amount, less the cost of materials, paid to the [prime] under the contract.” (emphasis added). This dramatically changes the way the limitation is calculated, and could result in an expansion or contraction of the subcontracting limit depending on the circumstances. For purposes of calculating whether the prime meets these new requirements, payments to “similarly situated entities” no longer need to be included as part of the amounts expended on subcontractors.

The FY2013 NDAA also now imposes the greater of $500,000, or the amount expended in violation of the rules as a penalty for violations. These new rules are effective immediately.