NATIONAL DEFENSE AUTHORIZATION ACT OF 2013 LIMITATIONS ON SUBCONTRACTING Final Rule Effective June 30, 2016 DoD Western Regional Council for Small Business Peter Van Steyn Procurement Center Representative Office of Government Contacting, Area VI

Final Rule Effective June 30, 2016 Final Rule: Covers a number of different aspects of small business federal contracting, including limitations on subcontracting, affiliation, “mixed contracts,” joint ventures and the nonmanufacturer rule, among others.

Revision to Limitations on Subcontracting Overview Revision to Limitations on Subcontracting Similarly situated entity or subcontractor Subcontracting compliance calculation formulas Subcontracting percentage limits Mixed Contracts Set-aside contracts ($3,500 and $150,000) Penalties

Similarly Situated Entity What is a “Similarly Situated Entity”? Subcontractor with the same small business program status as the prime contractor Subcontractor shall also be small for the NAICS code assigned by the prime contractor to the subcontract Subcontractor that is a small business participating in the same program in which the set-aside was awarded

Similarly Situated Entity (Continued) Only a 1st tier subcontractor can be counted as a similarly situated” subcontractor 1st tier subcontractor must perform the work with its own employees Lower tier subcontractors (non-similarly situated entity) count toward limitations on subcontracting (even if small business)

Similarly Situated Entity (Continued) Final Rule Makes clear that: Small business prime contractor need not include the amounts subcontracted to a "similarly situated" subcontractor in determining the subcontracted percentage allowed. Put another way - work subcontracted to similarly situated subcontractors will count as work done by the prime contractor for Limitation on Subcontracting purposes. The exception for similarly situated subcontractors applies to all four types of contracts described in FAR 52.219-14 (services, supplies, construction and specialty trade)

Subcontracting Compliance Calculation Formulas Section 1651 of the NDAA changed the formula for calculating the limitations on subcontracting under all types of small business set-aside contracts. Previously, SBA regulations and FAR clause (52.219-14, entitled "Limitations on Subcontracting") required a small business prime contractor to self-perform a certain percentage of the cost of total direct labor on the contract (depending on whether the contract is primarily for services, supply, construction or specialty trade construction) Services formula has shift from a “labor cost” based calculation to an “amount paid” or “contract value” based calculation Similarly, the final rule shifts the formula for supply contracts from a “cost of manufacturing” calculation to an “amount paid” calculation

Limitations on Subcontracting As revised by Final Rule (NDAA section 1651), compliance will be determined by a percentage cap on the total amount of the prime contract that may be paid to subcontractors. Services (except construction): Prime contractor will not pay more than 50% of the amount paid by the government to the prime to firms that are not similarly situated. Cost of materials are excluded and not considered to be subcontracted Supplies/products (other than from a nonmanufacturer of such supplies): Prime contractor will not pay more than 50% of the amount paid by the government to the prime to firms that are not similarly situated

Limitations on Subcontracting General construction contracts: Prime contractor will not pay more than 85% of the amount paid by the government to the prime to firms that are not similarly situated Specialty trade contracts: Prime contractor will not pay more than 75% of the amount paid by the government to the prime to firms that are not similarly situated In all such contracts, amounts paid to "similarly situated" entities are not considered "subcontracted" and thus excluded from the limitation

Mixed Contracts Final Rule introduces the term “Mixed Contract” “Mixed contracts” combine services and supplies CO must select a single NAICS code that best describes the principal purpose, or greatest percentage of the contract value Subcontracting limitation then applies to the portion of the award amount that represents the primary or principal purpose of the contract

Mixed Contracts In no case will both a services and supplies/products calculation apply to the same procurement For a contract principally for services, but which also requires supplies, this means that the prime contractor or its similarly situated subcontractors cannot subcontract more than 50 percent of the services to other than small concerns. However, the prime contractor can subcontract all of the supply components to any size business.

Mixed Contracts (Calculation Example) A procuring agency is acquiring both services and supplies through a small business set-aside. The total value of the requirement is $3,000,000, with the services portion comprising $2,500,000, and the supply portion comprising $500,000. The contracting officer appropriately assigns a services NAICS code to the requirement. Thus, because the supply portion of the contract is excluded from consideration, the relevant amount for purposes of calculating the performance of work requirement is $2,500,000 and the prime and/or similarly situated entities must perform at least $1,250,000 and the prime contractor may not subcontract more than $1,250,000 to non-similarly situated entities.

Mixed Contracts (Calculation Example) Total Contract Value = $3,000,000 Services = $2,500,000 Supply = $500,000   *CO assigned Service NAICS Code Service Portion = $2,500,000 for calculation of limitation on subcontracting 50% of $2,500,000 = At least $1,250,000 performed by prime contractor or with similarly situation entities.

Set-Aside Contracts Simplified Acquisition Threshold Final Rule: exempts small business set-aside contracts between $3,500 and $150,000 from the limitations on subcontracting. Exemption applies only to small business set-asides. Contracts between $3,500 and $150,000 that are awarded as 8(a), HUBZone, SDVOSB or WOSB set-asides will still be subject to the limitations on subcontracting.

Limitations on subcontracting Penalties Contractors that violate the limitations on subcontracting are subject to the penalties listed in 15 U.S.C. 645(d) except that the fine associated with these penalties will be the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.

Q&A Contact Information Peter Van Steyn U.S. Small Business Administration Government Contracting, Area VI 300 South Forth Street, Suite 400 Las Vegas, NV 89101 (702) 388-6651 peter.vansteyn@sba.gov