Congress Changes Key Calculation in Small Business Contracting Program

The Small Business Act, as is well known, sets aside certain federal contracts for small businesses. But how much of the contract work must the small business perform? Can it subcontract any of the work to a larger business? What limitations are there on subcontracting?

Of course it can subcontract – but the law provides for a limit of 50 percent of the work if the business wishes to remain eligible for the set-aside. But how should the 50 percent be calculated?

The National Defense Authorization Act of 2013 made a very significant change in that calculation. The act, signed into law on January 3, 2013, changes the calculation from a cost-based rule to a price calculation.

The new rule is still being fine-tuned by the Small Business Administration in its rule-making role. Under the new rule, in the case of a services contract, a small business prime contractor now “may not expend on subcontractors more than 50 percent of the amount paid to the [prime] under the contract.” In the case of a contract for supplies, the small business “may not expend on subcontractors more than 50 percent of the amount, less the cost of materials, paid to the [prime] under the contract.”

This will simplify the calculation, as it is quite easy to see how much the prime contractor, the small business, received, and how much it paid to subcontractors. So that will make life much easier for small businesses, which will have less to fear from auditors that have the power to impose monetary penalties or even disbar them from future contracts.

However, as always there are many details, and our next blog posts will discuss them.

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