DoD Issues a Limitations on Subcontracting Class Deviation; FAR Revisions Proposed

More than five years after Congress directed the Executive Branch to change the way small business contract performance requirements are calculated, the U.S. Department of Defense (DoD) and the Federal Acquisition Regulation (FAR) Council announced significant steps today to adopt these new requirements.

By way of background, in June 2016, the U.S. Small Business Administration (SBA) issued a final rule changing its regulations regarding the limitations on subcontracting applicable to small business set-aside contracts. SBA's amended regulations were promulgated in response to a directive in the 2013 National Defense Authorization Act (2013 NDAA) which required changes to how limitations on subcontracting requirements are quantified and which required inclusion of "Similarly Situated Entities" (SSEs) in the prime contractor's portion of the work under set-aside contracts.

The contracting community has been anxiously awaiting an amendment to the FAR, which has been asserted to be necessary for these Congressionally-mandated changes to become effective. Today, the DoD issued a Class Deviation which adopts SBA's current approach to Limitations on Subcontracting. The Class Deviation is effective immediately and applies to all DoD solicitations and contract awards from today forward.

DoD's Class Deviation was issued in conjunction with a notice of proposed rule-making issued by the FAR Council, which proposes to amend the FAR's Limitations on Subcontracting clause (52.219-14) to conform with the statutory requirement and SBA's previously announced final rule. Comments on the proposed rule are due on February 4, 2019. We will provide a more detailed examination of the proposed FAR changes in a subsequent post. We will also issue a post regarding a separate SBA proposed rule, also issued today, that makes further changes to SBA's limitation on subcontracting regulations and certain other items.

To summarize, the DoD Class Deviation changes the approach to Limitations on Subcontracting in two substantial ways, consistent with SBA's revised regulations. First, it shifts the basis for calculating the amount of work a prime contractor must perform on a set-aside contract from a cost-based analysis to a revenue-based analysis. Second, it allows a prime contractor on such a set-aside contract to count work performed by a SSE as if it were performed by the prime contractor itself, for purposes of meeting the limitation on subcontracting requirement. As a result, effective now, limitations on subcontracting will apply to DoD procurements as follows:

By submission of an offer and execution of a contract, the Offeror/Contractor agrees in performance of the contract in the case of a contract for—

(1) Services (except construction), it will not pay more than 50 percent of the amount paid by the Government for contract performance to subcontractors that are not similarly situated entities. Any work that a similarly situated entity further subcontracts will count toward the 50 percent subcontract amount that cannot be exceeded;

(2) Supplies (other than procurement from a nonmanufacturer of such supplies), it will not pay more than 50 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities. Any work that a similarly situated entity further subcontracts will count toward the 50 percent subcontract amount that cannot be exceeded;

(3) General construction, it will not pay more than 85 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities. Any work that a similarly situated entity further subcontracts will count toward the 85 percent subcontract amount that cannot be exceeded; or

(4) Construction by special trade contractors, it will not pay more than 75 percent of the amount paid by the Government for contract performance, excluding the cost of materials, to subcontractors that are not similarly situated entities. Any work that a similarly situated entity further subcontracts will count toward the 75 percent subcontract amount that cannot be exceeded.

Again, more to follow on the proposed FAR Amendments regarding Limitation on Subcontracting, and SBA's notice of proposed rule-making. In the meantime, if you have any questions, Holland & Knight's Government Contracts team is here to help answer your questions.