A New Way of Looking at Small-Business Percentages Under Federal Program

Previously, we wrote about changes in the federal contracting small business set-aside program under the National Defense Authorization Act of 2013. These changes, which are still being placed in final form by the Small Business Administration, affect the percentage of work under a contract that a small business must perform itself rather than subcontract out. The new law changes the calculation from a cost-based rule to a price calculation.

The new question that a contractor must ask is: What percentage of the amount that the government paid to the prime contractor (the small business) is then being paid by the prime contractor to subcontractors? If it’s more than 50 percent of the original contract amount, the prime contractor has violated the rules.

But there’s another twist. The prime contractor may disregard, for this purpose, any money paid to any other “similarly situated entities.”  This includes other companies in the same socio-economic category as the prime contractor – whether they be a small business, an 8(a) company, one owned by service-disabled veterans, or the like.

So, for example, if a woman-owned small business (WOSB) subcontracts to another WOSB, the dollar amount of that subcontract does not count against the 50 percent minimum. So, for example, if a WOSB receives a $1 million contract but subcontracts $600,000 to another WOSB, it has not violated the rules even though 60 percent of the contract amount has gone to a subcontractor.

This increases the flexibility granted to small businesses under the program. However, in practice these percentages can be complicated to figure. We recommend that small businesses seek experienced legal counsel when dealing with these issues.

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