The SBA made numerous changes to its regulations in the past year, but the FAR Council has largely failed to keep pace. Then, earlier this month, the FAR Council published three final rules to implement long-awaited changes to the FAR’s small business contracting requirements. While the changes concern small business contracting requirements, they will impact business contractors of all sizes. For example, one of the rules makes noteworthy changes to the FAR’s Limitations on Subcontracting, resulting in a more friendly regulatory landscape for small business prime contractors. Another of the rules provides clarity for large business contractors who seek to demonstrate “good faith efforts” to comply with a small business subcontracting plan. The new changes bring the FAR’s small business contracting requirements in line with the SBA’s regulations and will be incorporated into new contracts beginning on September 10, 2021.
Limitations on Subcontracting – Helpful Changes for Small Business Prime Contractors
Under the existing requirements in FAR 19.505 and FAR 52.219-14, Limitations on Subcontracting, small business contractors are required to self-perform a specific percentage of the work, as measured by the cost of the work. The percentage of work that the small business prime contractor must self-perform depends upon the nature of the work: 1) general construction – 15%; 2) construction by specialty trade contractors – 25%; 3) services or supplies – 50%. The FAR Council made two important changes to those regulations that it hopes will reduce the burden on small business contractors and enable those businesses to compete for larger contracts.
First, small business prime contractors are now permitted to satisfy the percentage work requirements through self-performance or by subcontracting directly to a “similarly situated entity.” For example, a HUBZone prime contractor engaged in general construction must demonstrate that 15% of the work is either performed by the prime or subcontracted directly to another HUBZone entity (only first-tier subcontracting is counted). To qualify as a “similarly situated entity,” the subcontractor must have the same small business status that qualified the prime for the award and, additionally, must be small under the subcontract’s assigned NAICS code.
The revised rules also call for all percentage calculations to be based on the total amount paid by the government to the prime rather than the cost of the work. As a result, the revised text of FAR 19.505 now requires that “for a contract or order assigned a NAICS code for general construction, the [small business prime contractor] 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.”