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Government Contracts Update

As 2018 comes to a close, government contractors should be aware of two legislative and regulatory developments effecting small business contracting: the Small Business Runway Extension Act of 2018 and the Federal Acquisition Regulatory Council's belated proposed amendments to the limitation on subcontracting clause.

The Small Business Runway Extension Act of 2018

On December 17, 2018, President Trump signed into law the Small Business Runway Extension Act of 2018 ("SBREA"). Pub. L. No. 115-324. This simple legislation amends the Small Business Act to change the number of years of revenue that must be averaged to calculate a small business' size from three to five. In effect, the SBREA allows growing small businesses to stay "small" longer, postponing the difficult transition that contractors face when they grow beyond their size standards.

This change is good news for contractors who would otherwise soon have surpassed their size standards after taking into account fiscal year 2018 revenue, or those who recently had to recertify as "other than small." Many of these contractors can now remain small for another two years, allowing them to compete for significant multiple-award indefinite delivery, indefinite quantity contracts that are set aside for small businesses. This change will also enable many contractors facing a mandatory recertification (such as those required on long-term contracts) to remain eligible for options that they would otherwise have lost.

Not everyone will welcome the SBREA with open arms. The change will necessarily increase competition for all small businesses, since more contractors will now retain small business status. Moreover, many small businesses will face the prospect of competing against contractors that currently earn substantially higher revenues yet are still deemed "small" based on a five-year average. The new rule will also harm any contractors with declining revenues that would have looked forward to obtaining "small" status as their prior years with higher revenues dropped out of the old three-year calculation. For those contractors, it will take even longer to become "small" and start competing for set-aside opportunities.

Limitations on Subcontracting in the FAR

The Federal Acquisition Regulatory ("FAR") Council is finally addressing an issue that has been lurking for nearly six years: updating the limitations on subcontracting clause to align with SBA regulations. See 83 F.R. 62540. FAR 52.219-14 limits the amount of work a prime contractor can subcontract on small business set-aside contracts. Under the current version of FAR 52.219-14, the prime itself must generally perform at least fifty percent of the work under the contract (measured by the cost incurred for personnel for services, or the cost of manufacturing for supplies).

This method of calculating workshare creates problems for SBA program participants. Some small businesses may be discouraged from competing for contracts simply because they would not be able to perform the required minimum level of work. For example, a small business may have the technical know-how to successfully perform, but lacks sufficient manpower. In addition, the record-keeping requirements to verify the total costs incurred for personnel, for example, are burdensome; the prime must be extra cautious for the term of the contract to ensure that it is always performing more than half the work itself.

Section 1651 of the National Defense Authorization Act (NDAA) for fiscal year 2013, Pub. L. No. 112-239, changed the limitation on subcontracting formula from a percentage of work to be performed by a prime contractor, to a percentage of the overall award amount to be spent by the prime on its subcontractors. The law also allowed subcontracts to "similarly situated" entities to count toward the fifty-percent requirement, providing greater flexibility and reducing the burden of compliance.

The SBA implemented the new formulation in a final rule effective June 30, 2016. However, the benefit of this change has remained elusive due to the fact that solicitations continue to use the old FAR clause containing the outdated, burdensome formulation. This has meant that contractors have been contractually obligated to follow the old formulation notwithstanding the statutory change to the limitation on subcontracting rules to allow greater flexibility. With the FAR Council's recent proposal, a new FAR clause aligned to the statute and SBA's rule should be coming soon. The proposed rule is open for comment until February 4, 2019, with the final rule to follow.