On December 3, 2018, the Department of Defense (DoD) issued a deviation from the FAR’s self-performance requirements, which applies to subcontracting limitations on contracts set aside for small businesses. Although the changes to subcontracting limitations were mandated by the 2013 National Defense Authorization Act (yes, 2013), implementation has been slow and piecemeal. The Small Business Administration (SBA) did not implement the changes until June 2016, and although the FAR Council recently issued a proposed rule that would bring the FAR into compliance, the FAR has not officially caught up. In the meantime, the discrepancy between the FAR and the SBA regulations has caused headaches for contractors who must decide whether to comply with the FAR, the SBA regulations, or both. The DoD’s deviation will bridge the gap for all DoD contracts until the FAR catches up. 

The deviation, like the SBA regulations, contains two particularly notable features. First, it dramatically simplifies the self-performance requirements, giving contractors greater certainty when attempting to ensure compliance. The existing requirements in the FAR can be confusing because, like the old SBA regulations, they vary subtly depending upon the type of small business and the type of good or service being procured. For example, in an 8(a) set-aside for a services contract (except construction), 50% of the cost of personnel on the contract must be spent on the contractor’s employees. By contrast, a HUBZone set-aside for the same type of contract has the same requirement, but with the caveat that amounts paid to employees of other qualified HUBZone small businesses count toward the contractor’s requirement.

Like the SBA regulations, the DoD deviation simplifies the self-performance requirements in a couple of ways. First, although it maintains differences based on the type of good or service being procured, the deviation eliminates the differences based on the type of small business. So, for example, all procurements for services that are set aside for small businesses will have the same requirement regardless of which small business program is at issue.

Furthermore, the deviation makes a subtle but important conceptual shift from self-performance requirements to limitations on subcontracting. Instead of focusing on different variations on the cost of performance (e.g., cost of personnel, cost of manufacturing goods, etc.), the deviation restricts the percentage of the total award that can be passed on to subcontractors. For example, under a contract for services (except construction) that is set aside for any type of small business, the prime contractor cannot spend more than 50% of the amount awarded by the Government on subcontractors. For general construction set-asides, the prime contractor cannot spend more than 85% of the amount awarded by the Government (excluding the cost of materials) on subcontractors. Again, these apply regardless of which type of small business program is at issue.

The second notable change to the self-performance requirements under the DoD deviation is that subcontracts with “similarly situated entities” are not counted toward the subcontracting limit. In other words, similarly situated entities are treated as if the prime contractor is performing the work. To be considered a “similarly situated entity,” a subcontractor must:

  1. Be a first-tier subcontractor
  2. Have the same small business program status as the prime contractor
  3. Be considered small for the NAICS code the prime contractor assigned to the subcontract

This allowance for subcontracts with similarly-situated entities should give prime contractors greater flexibility to take on larger projects without compromising the goal of ensuring that funds designated for small businesses end up in the hands of small businesses.

In sum, the DoD’s recent deviation from the FAR will bring its contracts in line with the SBA regulations and the 2013 NDAA. In addition to eliminating confusion about differences between the FAR and SBA regulations, it greatly simplifies small business contractors’ compliance obligations and provides them greater flexibility in meeting those obligations.