September 10, 2021
LONG-AWAITED REVISIONS TO FAR RULE ON SUBCONTRACTING LIMITATIONS SET TO TAKE EFFECT

At long last, revisions to the Federal Acquisition Regulation (FAR) rules on limitations on subcontracting by small businesses, including the nonmanufacture rule, are set to take effect today, September 10, 2021.  These revisions are part of a final rule under FAR issued on August 11, 2021 by the U.S. Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration.

The FAR revisions implement changes that the U.S. Small Business Administration made in 2016 to its own regulations that were aimed at eliminating inconsistencies in how the limitations on subcontracting and nonmanufacture rule were applied across the SBA’s different small business programs.  For example, under some small business programs, a prime contractor was required to perform a certain percentage of work itself, whereas under other programs, a prime contractor could include subcontracts to “similarly situated entities” in the percentage of work it performed.  In addition, the method for calculating compliance with the limitations on subcontracting also varied across small business programs.

As we wrote extensively about in a prior Bulletin (here), under the SBA’s 2016 changes to its regulations, for purposes of procurements under the SBA’s small business programs, compliance with subcontract limitations is determined by measuring the amount of a contract award that is spent by a prime contractor on its subcontractors rather than by measuring the percentage of work that is performed by the prime contractor.  The SBA’s 2016 changes also excluded from the subcontracting limitation any payments made by a prime contractor to similarly situated entities and applied its new methodology for determining compliance with subcontract limitations to all of its small business programs.  As amended, the SBA’s regulations defined a “similarly situated entity” as a subcontractor that is small under the NAICS code assigned to the subcontract by the prime contractor and with the same small business status as the prime contractor (e.g., HUBZone small business, 8(a) small business, WOSB, SDVOSB). 

The changes that the SBA made to its regulations in 2016, however, did not make it into either FAR or, perhaps more importantly, the FAR clause on subcontracting limitations - FAR 52.219-14 - that is inserted into small business government contracts.  Thus, FAR 52.219-14 persisted in requiring, for non-construction contracts, that at least half of the cost of work performed and at least half of manufacturing costs be expended in-house by the small business prime contractor.

Now, under the revisions set to take effect as of September 10, 2021, FAR Part 19 and FAR 52.219-14 largely mirror the SBA’s regulations.  In addition, the FAR revisions clarify that the subcontracting limitations and nonmanufacturer rule apply to set-asides and sole source awards made under FAR subparts 19.8, 19.13, 19.14, and 19.15, as well as to awards using the HUBZone price evaluation preference pursuant to FAR subpart 19.13, regardless of dollar value. 

The final FAR Rule set to take effect today should spur small business contractors to seek out other small business teaming partners with complementing capabilities, as it provides long-awaited assurance that these collaborations will not cause small business prime contractors to exceed subcontracting limitations.

To read the final FAR Rule containing the revisions go here

To read other articles from The GovCon Bulletin™ go here.