On May 31, the Small Business Administration (SBA) published the long-awaited final rules implementing requirements under the 2013 National Defense Authorization Act (NDAA). The proposed versions of these rules, which address a wide variety of issues affecting not just small business government contractors, but also large government contractors that subcontract with small businesses, were the subject of our five-part series in early 2015. Now that the SBA has reviewed comments, it has issued final versions of the rules that take effect on June 30, 2016. Here, we highlight just a few of the significant changes implicated by these rules.
- Limitation on Subcontracting: In final form, the new rules exclude work subcontracted to "similarly situated" small business entities from the figures used to determine compliance with the limitation on subcontracting. Specifically, on small business and other socio-economic set-aside contracts, the prime contractor may not pay more than 50% of the amount paid by the government to firms that are not similarly situated. This methodology not only simplifies compliance, but the new rule effectively means that there is no limit on the amount of work that may be subcontracted at the first-tier level provided the work is subcontracted to other like firms. To prevent abuse, the new rules state that the SBA will apply the limitation on subcontracting collectively to the prime contractor and any similarly situated first-tier subcontractor, which means that work not performed by the employees of the prime contractor or similarly situated first-tier subcontractor will count toward the limitation on subcontracting. Contractors also should note that, pursuant to statute, the new rules provide that businesses that violate the limitation on subcontracting are subject to a fine that is the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting. The SBA rejected requests from commenters on the proposed rule to provide a "good faith" exception to this penalty, noting that this penalty is a "strong enforcement mechanism" and will deter contractors from proceeding without a practical plan to comply with the limitation on subcontracting.
- Non-Manufacturer Rule: Under the new rules, the SBA will not apply the nonmanufacturer rule, which is an exception to the limitation on subcontracting, to the mandatory small business set-aside contracts valued between $3,500 and $150,000.
- Affiliation: The final rules codify decisions by the SBA's Office of Hearings and Appeals (OHA) finding that certain familial relationships—married couples, parties to a civil union, parents and children, and siblings—give rise to a rebuttable presumption of affiliation. The final rules also codify OHA decisions finding that there is a rebuttable presumption of affiliation if a firm derives 70% or more of its revenue from another firm over a three-year period.
- Joint Ventures: The new rules remove restrictions on the types of contracts for which small businesses may joint venture without being deemed affiliated for size determination purposes. Under the new rules, a joint venture of two or more concerns may submit an offer as a small business for any Federal procurement, subcontract, or sale, provided that each concern individually is small under the size standard corresponding to the NAICS code assigned to the contract. This change should lead to an increase in offers from joint ventures, or at least more active strategic consideration of joint ventures among small businesses.
- Calculation of Annual Receipts: The new rules clarify that passive income is to be included when calculating annual receipts for size purposes.
- Mergers and Acquisitions: The new rules provide that if a business submits an offer as a small business concern, and is the subject of a merger or acquisition after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.
These are only a handful of the significant changes that are coming to the small business landscape at the end of the month. Government contractors both small and large should examine these new rules carefully to determine the impact on their business. If you have any questions about small business contracting, please contact James Boland, Nathaniel Canfield, or any of the other attorneys in Venable's Government Contracts Group.