As we noted in an earlier blog post this month, the Small Business Administration has released a proposed rule that would affect, in several ways, the operation of several special business preference programs for federal contracts. These include the 8(a) program for disadvantaged small businesses, the HUBZone program for businesses in historically underutilized business zones, and the program to aid businesses run by service-disabled veterans (SDVO program).
Here is another part of the rule that the SBA has put forth, in this case for the purpose of implementing a provision of the National Defense Authorization Act of 2013 (NDAA). It’s a change that we have discussed before, about a year ago. We wrote in this blog then about changes that affect the calculation of the percentage, under any preference program, of the work under a contract that a small business must perform itself rather than subcontract out. We pointed out that the NDAA alters the calculation from a cost-based to a price calculation and that the SBA was drawing up a rule to implement this change. The agency has now done so.
The new question that a contractor must ask under the NDAA 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 in the NDAA provision, which is also incorporated in the proposed rule. 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 a small business, an 8(a) company, one owned by service-disabled veterans, or the like.
Assume, for example, that a company is both HUBZone-certified and a woman-owned small business (WOSB). The company is awarded a $1 million contract based on its WOSB status and 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. On the other hand, if it subcontracts $600,000 to a small business certified as a HUBZone that is not a WOSB, it has violated the rules.
As the SBA wrote in its discussion of the proposed rule: “In effect, the NDAA deems any work done by a similarly situated entity not to constitute ‘subcontracting’ for purposes of determining compliance with the applicable limitation on subcontracting. A similarly situated entity is a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant of and which qualified the prime contractor to receive the award. Subcontracts between a small business prime contractor and a similarly situated entity subcontractor are excluded from the limitations on subcontracting calculation because it does not further the goals of SBA’s government contracting and business development programs to penalize small business prime contract recipients that benefit the same small business program participants through subcontract awards.”
We agree that it makes no sense to penalize small businesses for that type of subcontracting and we endorse the SBA’s approach.
