A new proposed rule would resolve discrepancies between the SBA Regulations found in 13 CFR 125.6 and the current implementing Federal Acquisition Regulation (FAR) clause, FAR 52.219-14. When the proposed rule goes into effect, it will align the FAR clause with the SBA regulations in several areas, including the method of calculating LOS compliance, the “similarly situated” rule, and the “nonmanufacturer” rule. I will address the “nonmanufacturer” rule in a separate post, and focus instead on the first two areas here.

The discrepancy between the SBA Regulations and the FAR clause goes all the way back to the 2013 National Defense Authorization Act (NDAA), which modified LOS regulations by changing the method by which subcontracting is calculated, from one based on personnel costs incurred under the contract, to one based on contract value. In 2016, the SBA issued new regulations implementing the change in the LOS calculation, as well as its approach to whether “similarly situated” businesses can be included in the prime contractor’s share of the contract value; however, because the FAR clause had not also been changed, there was a regulatory discrepancy leading to uncertainty as to which approach small businesses and contracting officers should follow. When implemented, the proposed rule will largely put an end to the confusion.

Calculation of Limitation on Subcontracting Compliance

13 CFR 125.6 describes a simplified method for determining LOS compliance —all you have to do is compare the total contract price with the amount paid to non-similarly situated subcontractors. The FAR 52.219-14 method requires service contractors to “…perform at least 50% of the cost of the contract incurred for personnel with its own employees.”

Under the newly aligned rule, the calculation will be much simpler. From the proposed rule:

“Instead of requiring a percentage of work to be performed by a prime contractor, the limitations on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by the prime on subcontractors. As a result, the prime contractor no longer has to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e., contract price) that it spends on subcontractors.”

This approach makes compliance easier, because it eliminates the requirement for cost breakdowns by both the prime contractor and subcontractor(s). In addition, the cost of materials, supplies, and other direct costs no longer have to be separated out from the compliance calculation; rather, they are just rolled into the overall “contract price” paid to subcontractors.

“Similarly Situated” Rule

The proposed rule also brings the SBA Regulations and FAR into alignment with respect to the “similarly situated” rule. 13 CFR 125.6 excludes “similarly situated” subcontractors—businesses that falls into the same size or socioeconomic category for the purposes of the set-aside—from the subcontractor share in performing the compliance calculation, while FAR 52.219-14 currently does not. An alternative, but functionally identical way of looking at this issue is that “similarly situated” subcontractors are included with the Prime Contractor’s share under SBA rules, while under the FAR, the only way for a small business to comply with the LOS is to perform the 50% work share requirement in-house, with its own labor.

The proposed rule adds a definition of “similarly situated entity” that essentially adopts the SBA’s approach. From the rule:

‘‘Similarly situated entity’’ means a first-tier subcontractor, including an independent contractor, that has the same small business program status as that which qualified the prime contractor for the award; and is considered small for the NAICS code the prime contractor assigned to the subcontract the subcontractor will perform. An example of a similarly situated entity is a first-tier subcontractor that is a HUBZone small business concern for a HUBZone set- aside or sole-source award under the HUBZone Program.”

Once adopted, small businesses will have greater flexibility to manage proposals and programs subject to the LOS by allowing greater opportunities for teaming with other small businesses.

Conclusion

Overall, this will make life somewhat easier for small businesses. The proposed rule simplifies the method for calculating LOS compliance, and reduces the amount of time and effort small businesses will have to spend breaking down workshare costs in order to comply with the FAR clause. The “similarly situated” rule also gives small business more options from a proposal and program planning perspective by increasing the options available for LOS compliance.

It is entirely possible that small businesses could have operated with the understanding of the subcontracting calculation and “similarly situated” rule laid out in the proposed rule since 2016, when the SBA’s rules implementing the 2013 NDAA went into effect. In previous cases, SBA has argued that it has the authority to decide small business issues, and that if there are any conflicts between SBA Regulations and the FAR, then SBA Regulations should prevail. There are decisions from both the Government Accountability Office (GAO)and the Court of Federal Claims that have agreed with the SBA’s argument. However, since the specific provisions at issue had not been tested, if the interest of the small business is to minimize risk, then compliance with both the SBA Regulations and the FAR provisions would be the best approach.

A copy of the proposed rule can be found here. Comments are open until February 4, 2019.