I am bringing you the first video blog of the New Year from Whitcomb, Selinsky. Whitcomb, Selinsky, is a veteran owned and operated law firm in Denver Colorado. Our focus is veteran centric. We do a lot of government contract work in our office, so today we're going to be talking specifically on a subject that comes up quite a bit in the context of government contracting, which is referred to commonly as the limitations in subcontracting. That regulation is governed primarily by 13 CFR 125.6, which is under the Small Business Administration regulations. The regulation was promulgated in July of 2016 and there were several iterations of the rule that came out afterwards. Several that year and then some subsequent modifications of the rule.
1. [The New Rule]
2. [Big Changes: Fines and Similarly Situated Entities]Under the new rules in the 13 CFR 125.6, a couple of things have changed. A big one is that it added a penalty of a minimum of five hundred thousand dollars for violating the limitations in subcontracting. It was, it's actually written, it's the greater of five hundred thousand dollars or the difference between the fifty percent that you were allowed to subcontract to other similarly situated entities and what you actually subcontracted. The other important thing is it did add the language about similarly situated entities, so a small business awardee under a small business set-aside can subcontract to another small business awardee and not violate the rule. The same thing with an SDVOSB. Our firm deals with a lot of service-disabled veteran-owned small businesses or SDVOSBs. So, if an SDVOSB pursues and wins an SDVOSB set aside contract and subcontracts to another SDVOSB then they're not going to run afoul of 13 CFR 125.6 and will remain in compliance. But if that same SDVOSB wins your contract and subcontracts more than fifty percent of that contract value to, say, another small business that is not an SDVOSB, then they could be suffering some pretty hefty penalties. The other thing that 13 CFR 125.6 does is it creates a time measurement [for compliance]. The measurement is the base year or the base period of performance. So, not all contracts are awarded for a base year. Your timeline for complying with the limitations in subcontracting is that base period whether it be six months or a year or some shorter period. You have to comply with that and then each option year is a separate compliance period.
3. [Independent Contractors]It added the similarly situated entity [language]. It also for the first time dealt with the issue of independent contractors. The new rule in 13 [CFR] 125.6 specifically defines independent contractors for the purpose of complying with limitation subcontracting, as subcontractors that is. There is no language under the old rule dealing with independent contractors. Now there is, so if again if this becomes particularly sticky or nuanced if you're an SDVOSB that is competing for a VA SDVOSB set aside, because then not only does your subcontractor have to be a veteran owned or service disabled veteran-owned small business, but that company must also be registered in the CVE database in order for you to be compliant with the limitations and subcontracting. They can't be simply a self verified SDVOSB, who’s verified on SAM[.gov].
3. [First Tier Subcontractors: Same as Prime Contractor]The other new addition to the 13 CFR 125.6 in the limitation subcontracting is that it treats first tier subcontractors the same as prime contractors for the purpose of compliance with limitations. So, if you if you had the time  and the the energy to read the Federal Register when these rules were promulgated back in May of 2016 when the proposed rule was being promulgated, one of the things that the the SBA and the FAR Council or the SBA Small Business Administration considered was what happens if I'm a service-disabled veteran-owned small business and I go out and win an SDVOSB set-aside and I subcontract to another CVE verified SDVOSB company and then they turn around and subcontract to a large company or to another small business that's not an SDVOSB? The language in the proposed rule and the discussion about the proposed rule stated that first and prime contractors and first tier subcontractors would be treated the same. Meaning that the prime contractor is responsible for ensuring that their first year subcontractor does not subcontract out more than the allowable percentage to other than similarly situated small business, be this a woman owned or SDVOSB.
I don't have any examples handy where that particular provision of the regulation is enforced but it is something that the DOJ has taken a particular interest in. The US Attorney's Office rather has taken a particular interest in in making sure that prime contractors who are awarded are complying with these limitation subcontracting. Again, there's a minimum of a half a million dollar fine associated [with a violation]. It's a statutory fine that was written into the statute in 2013. Again, it's designed to give this regulation teeth and to make sure that contracts that are set aside for small businesses or service- disabled veteran-owned small businesses are actually benefiting the companies that they were designed to benefit.