When an agency decides to set aside an acquisition for participation only by small businesses, certain subcontracting limitations apply to the small business awardee. For construction contracts, the small business contractor cannot pay subcontractors more than 85% of the amount they receive from the agency. For service and supply contracts, the small business contractor cannot pay more than 50% of the amount paid to it by the agency to other entities that are not similarly situated. Work performed by similarly situated entities is not considered in determining if the limitation on subcontracting is violated. A similarly situated entity is defined as a small business subcontractor that is a participant of the same small business program as the prime contractor and is small for the NAICS code assigned by the prime contractor to the subcontract.

There is a lot of confusion regarding the current state of the law when it comes to limitations on subcontracting. This is largely because the FAR’s limitations on subcontracting provisions have not been updated to correspond with the statutory changes that were made by Congress in the FY 2013 NDAA. The FY 2013 NDAA changed the way that compliance with the limitations on subcontracting provisions is calculated, shifting from formulas that were based on the cost of contract performance (cost of personnel and cost of manufacturing) to formulas that are based on the amount paid by the agency. This confusion is compounded by the fact that the SBA’s new regulation, which incorporates and implements the statutory changes, went into effect on June 30, 2016.

In a recent bid protest, the GAO had an opportunity to address the limitations on subcontracting issue head on but instead elected to deny the protest, as being a matter of contract administration, without first clarifying whether the FAR or the SBA regulation governs. In that case, the GAO issued a decision suggesting that the changes implemented by the SBA regulation took precedence over the FAR despite the fact that the service contract in question contained FAR 52.219-14, which expressly points to the total cost of contract performance and not the total amount paid by the agency. Specifically, when discussing the awardee’s Management Approach, the GAO noted, “[t]he agency explains that since the value of the contract awarded to OSC was $44,290,359, OSC’s proposal indicated that it would perform 56.5 percent of the required effort with its own employees, which is compliant with the limitations on subcontracting clause.” This language clearly shows that both the agency and the GAO applied the new limitations on subcontracting formula, which considers the amount paid by the agency, instead of the old formula, which considers the cost of personnel. Synaptak Corporation, Inc., B-415917.5, B-415917.6, Sept. 24, 2018.

The entire GAO decision can be found here.