Under current regulations, an 8(a) Prime Contractor is limited in the amount of work it can subcontract under an 8(a) contract. Through partnership agreements between the SBA and procuring agencies, contracting officers are responsible for monitoring whether 8(a) contractors are in compliance with applicable subcontracting limitations.
The 2013 NDAA amended the Small Business Act to change what costs are considered to be subcontracted work. It also imposed a monetary penalty on contractors that violate the subcontracting limitations (the minimum penalty is $500,000). The SBA represented in July that it had drafted the proposed rule to implement the 2013 NDAA amendments and that the proposed rule is currently in the review process (according to the OMB website, the proposed rule was submitted for review on June 16, 2014).
The GAO Report
As a result of their most recent study, the GAO found that in general, contracting officers are still not ensuring compliance with subcontracting limitations. Contracting officers gave these reasons as to why they were not doing so: (1) they were not responsible for monitoring compliance; (2) they were not fully aware of their responsibilities regarding monitoring compliance; (3) they did not have access to information on the extent of subcontracted work performed; and (4) they were more concerned with contractors' satisfactorily performing the services under the contract.
With respect to the two contracting officers that actually did monitor subcontracting, they did so by making an initial assessment (pre-contract award) as to whether the offeror could comply with the limitations and by requiring the contractor to regularly provide information (post-contract award) on the extent to which work was subcontracted.
The report pointed out several situations which underscored the need to monitor subcontracting:
- Incumbent contractor was identified as a subcontractor in proposal;
- Proposal identified that the amount of subcontracted work would approach subcontracting limitations;
- Contracting officer thought but did not confirm that subcontracting limitations were exceeded;
- Subcontractors were not identified in the proposal but performed work on the contract;
- Subcontractor rather than prime contractor submitted documents to or corresponded directly with government officials; and
- Contractor reported its subcontractor was more experienced with meeting the contract requirements.
The GAO made the following recommendations:
- At the time of contract award, contracting officers shall conduct and document an assessment of the 8(a) firm's ability to comply with the subcontracting limitations;
- Contracting officers shall include monitoring and oversight provisions in all 8(a) contracts to ensure that the contractors comply with the subcontracting limitations; and
- Prime 8(a) contractors shall periodically report to the contracting officer on the percentage of subcontracted work being performed.
Given that the SBA's proposed rule implementing the 2013 NDAA amendments to the limits on subcontracting is expected to be issued soon and in light of the GAO's report, the subcontracting issue is sure to receive more attention and scrutiny. We anticipate there will be greater scrutiny of Teaming Agreements and Subcontracts and we strongly urge our clients as well as all federal contractors to be proactive in terms of ensuring they have proper documentation establishing compliance. For more information on compliance with subcontracting limitations, please contact us today at (808) 369.9710.