Applicable Limits: For contracts that have been awarded pursuant to a small business set-aside or socioeconomic set-aside (i.e., 8(a), HUBZone, SDVOB, or WOSB/EDWOSB), the prime contractor may not pay more than 50% (or other amount depending on what type of contract it is) “of the amount paid by the government to it to firms that are not similarly situated.”
- For mixed contracts, the NAICS Code assigned to the contract will dictate which percentage/limit applies (i.e., services, supply, construction, specialty trade), and the applicable percentage/limit on subcontracting will apply only to that portion of the contract.
- Example: If a contract has both a service and supply component but has been assigned a service NAICS Code since the contract is principally for services, then the 50% percent limit will apply only to the services portion of the contract. The Prime Contractor would be able to subcontract out the entire supply portion to any business.
- Compliance with the limits on subcontracting will be determined by looking first at the base term and then each subsequent option period.
- For orders that have been set aside under a full and open contract, the applicable limit on subcontracting must be met for each order.
- Any amounts subcontracted to “similarly situated entities” will not count as subcontracted for purposes of determining whether the Prime Contractor has violated the limits on subcontracting.
- A “similarly situated entity” is one that: (1) has the same small business program status as the Prime Contractor with respect to the small business program that qualified the Prime Contractor for award of the contract; and (2) is small for the NAICS code that the Prime Contractor has assigned to the subcontract.
- Any work that a similarly situated first tier subcontractor then subcontracts to any entity will be counted as subcontracted to a non-similarly situated entity for purpose of determining compliance with the limits on subcontracting.
Penalties: Violation of the limits on subcontracting will be the greater of $500,000 or the dollar amount spent, in excess of permitted levels, by the entity on Subcontractors.
- In addition, “a party’s failure to comply with the spirit and intent of a subcontract with a similarly situated entity may be considered a basis for debarment.”
Exception to Affiliation: Two or more small businesses may joint venture and submit an offer as a small business for any procurement without being affiliated (with regard to performance of that specific procurement) provided that each business is small under the size standard corresponding to the NAICS Code assigned to the contract.
Identity of Interest: SBA may presume an identity of interest between firms based upon economic dependence if the concern in question derived 70% or more of its income from another concern over the previous 3-year period.
- This presumption may be rebutted by showing that despite the contractual relationship with the other firm, the concern at issue is not solely dependent on that other concern (i.e., where the concern at issue has been in business for a short period of time).
- The SBA clarified that this rule does not apply to firms owned by Indian Tribes, ANCs, NHOs or CDCs.
- Ostensible Subcontractor: Subcontracts to similarly situated entities will be excluded from consideration under the ostensible subcontractor rule.
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