Back when the U.S. Congress was adopting the 2013 version of the National Defense Authorization Act (NDAA), it included directives to the Small Business Administration (SBA) to make changes to multiple rules pertaining to small business set-aside contracts and subcontracting. On Monday, May 31, 2016, the SBA published final rules in the Federal Register implementing each of these changes.
The following are some of the most significant changes in detail. All of the changes can be seen at: https://www.federalregister.gov/articles/2016/05/31/2016-12494/small-business-government-contracting-and-national-defense-authorization-act-of-2013-amendments.
Part I: Work Performance by Small Business Concern.
SBA’s final rule, Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments, implements numerous changes to the requirements that ensures certain amount of work is performed by a small business concern (SBC). This rule became effective June 30, 2016.
The current method of calculating compliance with the limitations on subcontracting requires the prime contractor to perform a certain percentage of work under a set-aside contract.
The FY2013 NDAA replaced this method with one that limits the percentage of the award amount received by the prime contractor that may be spent on subcontractors. Under this method, work done by “similarly situated” first-tier subcontractors does not count as subcontracted work for purposes of determining compliance with the limitation on subcontracting requirement. To address concerns as to potential pass-through schemes, SBA is applying the limitations on subcontracting collectively to the prime and any similarly situated first-tier subcontractor, such that any work performed by a similarly situated first-tier subcontractor will count toward compliance with the applicable limitation on subcontracting. But, any work that a similarly situated first-tier subcontractor subcontracts, to any entity, will count as subcontracted to a non-similarly situated entity for purposes of determining whether the prime/sub team performed the required amount of work.
The method for calculating compliance will continue to be based on the NAICS code assigned to the contract. The limits in the final rule are:
- 50% for services
- 50% for supplies
- 15% for general construction, and
- 25% for specialty trade construction.
The final rule also makes clear that the cost of materials is excluded from the calculation and not considered to be subcontracted.
Penalties for Non-Compliance
SBA has implemented in the final rule the penalties listed in 15 U.S.C. 645(d) for concerns that violate the limitations on subcontracting requirement contained in the FY2013 NDAA.
Impact on Teaming
The impact of this new method of calculating limitation on subcontracting will be on the way that SBCs choose subcontractors and teaming partners. SBC prime contractors will likely look to target subcontracts to “similarly situated” entities so that those dollars subcontracted will not count against it, and will need to consider status carefully when identifying NAICS codes to assign to subcontracts.
FAR v. SBA Regulations
Between the time that this rule becomes effective and the time that the FAR Council revises the FAR solicitation provisions and contract clauses to marry up with the revised SBA regulations, there will be a period of uncertainty as to which calculation method will apply to procurements. If a solicitation references the FY2013 NDAA language or new version of 13 C.F.R. § 125.6 but contains FAR 52.219-14 (NOV 2011), use the Q&A process to seek clarity as to how the agency intends to determine offerors’ compliance with the limitations on subcontracting requirement.
To the extent that an agency is using the new calculation method, consider seeking clarity from the agency as to how offerors must demonstrate independent contractors are similarly situated. Will it be sufficient to merely state in the proposal that a SBC prime contractor will use ‘independent contractors’ and ensure compliance with the limitations on subcontracting provision? Does an offeror have to separately identify its similarly situated independent contractors in its proposal? Must an offeror have received certifications from its independent contractors as to size and status prior to proposal submission? Will these independent contractors be registered on SAM with DUNS numbers and CAGE codes?
Part II: Prime Contractors’ Compliance with Subcontracting Plans.
The Small Business Administration’s (SBA) final rule, Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments, implements changes that impact the proposal process which can involve planning and team selection months in advance of proposal submission, contractors need to focus on the new requirements now.
Notice to Named Small Business Subcontractors
One of the immediate action items for contractors arising out of the final rule comes from the new requirement that if a large prime contractor identifies a small business concern (SBC) by name as a subcontractor in a proposal, offer, bid or subcontracting plan, the prime contractor must notify the SBC in writing prior to such identification.
Increased Scrutiny on Prime Contractors’ Compliance with Subcontracting Plans
- The final rule is likely to lead to increased scrutiny of whether prime contractors are satisfying their small business subcontracting goals over the course of performance, pursuant to the requirements in 13 C.F.R. § 125.3.
- The SBA has established a “whistleblower” mechanism to allow potential subcontractors to report fraudulent activity or bad faith behavior by a prime contractor with respect to a subcontracting plan. 13 C.F.R. § 125.3(c)(9).
- The final rule lays out the process whereby Commercial Market Representatives (described in 13 C.F.R. § 125.3(e) as “SBA’s subcontracting specialists”) with a reasonable basis to believe that a contractor has made a false statement to the Government or prime contractor must report the matter to the SBA OIG.
- Section 13 C.F.R. § 125.3(f) is modified to include that contracting agencies must also perform evaluations of a prime contractor’s subcontracting plan performance, and that SBA’s evaluations of subcontracting plan performance are completed as a supplement to the contracting agency’s review.
Penalties for Failure to Demonstrate Good Faith Compliance Augmented
Currently, the failure to demonstrate a good-faith effort to comply with its small business subcontracting plan and/or to provide a written corrective action plan following receipt of a marginal or unsatisfactory rating regarding subcontracting plan performance can subject a contractor to liquidated damages. The final rule specifies that these two occurrences will now also place the contractor in material breach of the contract and the failure to demonstrate good faith must be considered in any past performance evaluation of the contractor, thereby impacting the contractor on future procurements.
Part III: Small Business Recertification.
Small Business Government Contracting and National Defense Authorization Act of 2013 Amendments implementing the National Defense Authorization Act of 2013 (FY2013 NDAA) Amendments – a new recertification requirement that is triggered following the merger, sale, or acquisition of a firm that has submitted an offer as a small business concern (SBC).
A business or concern that represents itself as a small business and qualifies as small at the time of proposal submission is considered to be a small business throughout the life of that contract, unless a recertification requirement has been triggered.
The issue is that if a small business concern could submit a proposal with pricing, certify that it is small, and actually qualify on that date of proposal submission as small, should that small business be able to sell itself following proposal submission or contract award to a large business and allow the large business to benefit for up to five years of contract performance as a “small business”? The SBA’s answer to that is no. The SBA’s regulations as currently drafted require recertification in certain circumstances following a merger, sale, or acquisition but only once award has already been made. In the final rule, SBA imposes new recertification requirements aimed at changes that occur within the window between proposal submission and contract award.
Current Recertification Requirements
The SBA determines the size status of a firm, including its affiliates, as of the date the firm submits an offer to the procuring agency that includes price. See 13 C.F.R. § 121.404(a).
Under the current SBA regulations, the SBA requires SBCs to recertify size status in two (2) circumstances. First, SBCs must recertify to the procuring agency within 30 days of an approved contract novation. 13 C.F.R. § 121.404(g)(1). If it cannot recertify as small, the offeror must inform the procuring agency that it is other than small. If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals.
Second, where contract novation is not required, SBCs must recertify within 30 days of a transaction becoming final, or inform the procuring agency that it is other than small. 13 C.F.R. § 121.404(g)(2(i). If the contractor is other than small, the agency can no longer count the options or orders issued pursuant to the contract, from that point forward, towards its small business goals. Recertification is required in these circumstances:
(A) When a concern acquires or is acquired by another concern;
(B) From both the acquired concern and the acquiring concern if each has been awarded a contract as a small business; and
(C) From a joint venture when an acquired concern, acquiring concern, or merged concern is a participant in a joint venture that has been awarded a contract or order as a small business.
13 C.F.R. § 121.404(g)(2)(ii).
As drafted, these regulations do not expressly require recertification in situations where a proposal has been submitted but before award is made. Nor do these regulations require that an agency exclude an offeror from a procurement when a small business concern became “large” after the date required for self-certification.
The New Recertification Requirement on Small Businesses
In the final rule, the SBA adds a recertification requirement as 13 C.F.R. § 121.404(g)(2)(ii)(D). Now, if the merger, sale or acquisition occurs after offer but prior to award, SBCs will have to recertify its size to the contracting officer prior to award.
The final rule also broadens the scope of required recertification in cases where contract novation is not required.
These changes became effective June 30, 2016.
Summary: The NDAA FY2013 changes are wide ranging, amending SBA’s non-manufacturer rule and affiliation rules, and for the first time allowing joint ventures to qualify as small for any government procurement as long as each partner to the joint venture qualifies individually as small under applicable size standards. Moreover, this rule becomes effective June 30, 2016. However, changes to the parallel FAR requirements are still needed for regulatory consistency and implementation.
If you have any questions or comments about the contents of this article, please contact General Counsel, P.C. – Government Contracts Practice Group.
Written by Sharon O. Steele, Chair of the Government Contracts Practice Group