On January 19, 2016, the SBA Office of Hearings and Appeals (OHA) issued a decision in the Matter of: Prosouth Construction Svcs, LLC. This appeal arose out of Prosouth's size protest against Birmingham Industrial Construction, LLC in conjunction with a construction procurement. In its protest, Prosouth, an unsuccessful offeror, alleged generally that Birmingham was not a small business under the applicable $15 million size standard and questioned whether Birmingham had the ability to self-perform at least 25% of the cost of contract performance, in accordance with the applicable limits on subcontracting.
The OHA's decision in this case was very short and straight to the point. In dismissing Prosouth's appeal of Birmingham's size, the OHA made the following important points:
- A size protest must allege specific facts. A size protest that alleges generally that the concern is not small without supporting facts or information indicating how the concern exceeds the size standard will dismissed as insufficiently specific.
- A contractor's compliance with the limits on subcontracting is "an element of responsibility and not a component of size eligibility."
Limitations on Subcontracting
As many of our readers know, 13 CFR 125.6 sets forth the prime contractor performance requirements (also known as limitations on subcontracting). Under the current regulation, where a contract has been awarded as a full or partial small business set-aside, 8(a) contract, or WOSB/EDWOSB contract, the Prime Contractor must:
- In the case of a contract for services, perform at least 50% of the cost of the contract incurred for personnel (i.e., labor) with its own employees.
- In the case of a contract for supplies or products, perform at least 50% of the cost of manufacturing the supplies or products (not including the cost of materials).
- In the case of a contract for general construction, perform at least 15% of the cost of the contract with its own employees (not including the cost of materials).
- In the case of a contract for construction by special trade contractors, perform at least 25% of the cost of the contract with its own employees (not including the cost of materials).
Subsection (e) also states that compliance with these limitations will be an element of responsibility and not a component of size eligibility. Under the Federal Acquisition Regulations, a contract cannot be awarded unless the contracting officer has made an affirmative determination regarding the contractor's responsibility. Generally speaking, responsibility determinations look at the contractor's capabilities and conduct, including: financial resources, ability to comply with performance/delivery schedules, performance record, necessary organization and experience, and necessary equipment and facilities. In addition, a contractor can be found to be non-responsible based on things like: failure to comply with EEO requirements, failure to comply with or agree to an acceptable small business subcontracting plan (if applicable), and unavoidable or unmitigated organizational conflicts of interest.
Subsection (e) therefore means that whether or not a contractor has the ability to self-perform in accordance with the requirements listed above is something that the procuring agency (through the contracting officer) must determine and monitor for monitoring compliance. Contracting officers are empowered to do this by:
- At the time of contract award, conduct and document an assessment of the prime contractor's ability to comply with the subcontracting limitations;
- Include monitoring and oversight provisions in contracts to ensure compliance with subcontracting limitations; and
- Generally ensure compliance by prime contractors.
The challenge with respect to this issue, which is likely why Prosouth chose to include it in its size protest is the belief and/or perception that contracting officers are not sufficiently and effectively ensuring compliance with the limits on subcontracting and further, that there are limited ways for "interested parties" to challenge whether in fact a specific contractor is complying or is capable of complying with the limits. In fact, in a GAO Report published in January 2013, the GAO found that responsibilities for ensuring compliance with limitations on subcontracting were not being met. While this Report was specific to 8(a) contracts, we can certainly assume that this is also the case for other contracts subject to the limitations on subcontracting.
As many of you know, the new regulations regarding limitations on subcontracting are expected to be issued by the SBA this summer. The new regulations will include a new method for calculating the limits on subcontracting as well as the similarly-situated rule, both of which will have significant impacts on subcontracting. While the SBA has already given some indication of what the Final Rule will contain (see our prior blog post on the National (a) Association's Winter Conference), it will be interesting to see what the Final Rule includes and whether there are any additional or more specific monitoring requirements.
The limits on subcontracting exist to ensure that new small businesses get their fair share of contracting dollars and are not taken advantage of by large businesses and/or incumbent contractors. While not everyone agrees with the need for limits on subcontracting or that it is the correct way to accomplish those goals, ensuring compliance with the limits on subcontracting is nonetheless essential to the integrity of federal contracting as it relates to small business set asides, including contracts to the various classes of small businesses. Thus, we encourage our clients and readers to seek necessary guidance if you are unsure of whether you are compliant or have questions about complying with the limits on subcontracting.