Skip to content

Ignoring Small Business Subcontract Limits Could Cost You

Is your operation classified as a small business? Have you received, or are you pursuing U.S. government prime contracts set aside or reserved for small business? If so, the clause in the Federal Acquisition Regulation (FAR) 52.219-14 titled “Limitations on Subcontracting” will be included in your contract. This clause specifies the percentage of work that must be performed by a small business when it receives a set-aside reserved for small businesses.

The provision is included in solicitations and contracts for supplies, services and construction, if any portion of the requirement is to be set aside or reserved for small business and the contract amount is expected to exceed $150,000. This includes all contracts awarded under FAR Subpart 19.8, “Contracting with the Small Business Administration (the 8(a) Program).”

The clause applies to:

  • Parts of a multiple-award contract that have been set aside for small business concerns or 8(a) concerns; and
  • Orders set aside for small business or 8(a) concerns under multiple-award contracts.

This clause does not apply to the unrestricted portion of a partial set-aside.

The purpose of the solicitation provision/contract clause is to assure that small business concerns perform a significant portion of the contract work when there is a small business set-aside. The objective is to mitigate the potential for a small business to win the award and then have a large business perform most of the contract work.

This would circumvent the purpose of the small business set-aside program, which is to provide small businesses the opportunity to perform work under government contracts. When this clause is included in your contract, you have contractually agreed that a minimum percentage of the cost of contract performance will be incurred by and/or performed by your concern.

While the language in the provision/clause only addresses the small business concern receiving the contract, in practice the provision has historically been applied based on the percentage of work performed/cost incurred by all small business under the contract, but more recently, to all similarly situated small businesses under the contract. A similarly situated small business would be one that qualifies for the same small business classification as your concern.

For example, if your concern is classified as a small disadvantaged business, receives the contract, and performs 25 percent of the work, and you award a subcontract to Small Business B, another small disadvantaged business that performs another 30 percent of the work, the percentage of work performed under the contract for purposes of applying the clause would be 55 percent (the amount performed by your concern plus the amount performed by Small Business B, as you are both similarly situated small businesses with the small disadvantaged business classification).

Minimum percentages are specified as follows:

  1. Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.
  2. Supplies (other than procurement from a non-manufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.
  3. General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.
  4. Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

The U.S. Government Contracting Officer’s Technical Representative (COTR) and/or the Contracting Officer generally are responsible to ensure your compliance with the clause. In practice, the extent of such reviews has historically been very limited. While some U.S. Government contracting personnel will track the amount of work performed by the small business concern, a larger majority of contracts do not.

Compliance verification has historically been made difficult by the fact that the provision is based on the cost/performance percentage for the entire contract period and there is no specific remedy for noncompliance. Thus, while your small business concern might be falling short of the required percentage at the midpoint (or later time) of the contract, there is generally no action to be taken, since the provision only applies to the percentage as of the end of the contract performance period and there is no specific remedy for your failure to meet the specified percentages.

However, recent changes in the law now add penalties for failure to follow the limitation of subcontracting provisions, and thus in the near future it is anticipated that there will be a significant dollar remedy. Furthermore, under the current processes, failure to comply can severely impact your past performance evaluations and result in potential actions by the U.S. Small Business Administration for systemic noncompliance with the clause, thus affecting your ability to receive awards of additional U.S. government contract business.

It is important to note that the provision does not adequately address application to task orders under Indefinite Delivery/Indefinite Quantity (IDIQ) contracts. When a small business concern receives multiple task or delivery orders under an IDIQ contract, questions can arise as to whether the percentage applies to each order or only to the total work performed under the IDIQ contract. The language in the provision/clause fails to address this issue.

Tips

When pursuing or executing a small business set-aside contract that includes FAR 52.219-14 “Limitations on Subcontracting:”

  • Ensure you have access to sufficient resources to accomplish the required percentage of work.
  • Consider alliances with other similarly situated small businesses.
  • During negotiations for Indefinite Delivery/Indefinite Quantity (IDIQ) contracts, ask your U.S. Government Contracting Officer to clarify whether the clause requirements will be applied to each order, or only to the total work performed under the IDIQ contract.
  • Monitor your concern’s incurred costs to identify shortfall situations in sufficient time to enable prudent management of contractual efforts and ensure compliance with the contract requirements.

© 2016


Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: