SBA and FAR Council Shortfalls Cause Subcontracting Limitations Confusion

The New(ish) Subcontracting Limitations

In January 2013, Congress enacted 15 USCA § 657(s), which in its relevant part states (1) in the case of a contract for services, may not expend on subcontractors more than 50 percent of the amount paid to the concern under the contract. (see 15 U.S.C.A. § 657s (West) )  This statute was meant to clear up confusion created by the old FAR provision, 48 C.F.R. (FAR) § 52.219–14 (2002), which states, in part, that “[a]t least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.”   One commenter on the old FAR provision wrote:

In practice, what constitutes the ‘cost of contract performance ‘for personnel has been impossible to understand or implement. So for example, if a small business prime contractor was awarded a $100,000 contract to maintain trucks at a military base and the small business prime contractor wants to subcontract engine maintenance to a large business, the small business prime contractor would have to convert the firm fixed price into a ‘cost of performance ‘metric and compare their cost of performance for personnel to the cost of performance of the large business subcontractor. No one (the businesses or the government) really knows if they are administering the limitations on subcontracting correctly and this uncertainty has led to many disputes with the government and between prime and subcontractors. Fortunately, the NDAA changed this vague requirement into a simple calculation. In our example, the small business prime contract awarded a set aside contract could subcontract $50,000 of the award to a large business – simple and easy to administer2014 Testimony before congress on subcontracting

Ms. Jennifer Bisceglie, President of a Small Woman Owned Enterprise, Interos, complained that in order to enforce the provisions of FAR §52.219–14, contracting officers (COs), would need to have access to contractor and subcontractor performance cost data, which no provision of the FAR requires to be maintained.  Similarly, contractors would be tasked with finding out operational data, like personnel costs, from their subcontractors.  Imagine calling one of your subcontractors and demanding they produce their 941s or payrolls summaries.  Imagine requiring further that they break down those personnel costs by each contract they are performing.  This might be easy enough to do, if any subcontractor was inclined to do it absent a Congressional mandate, if the subcontractor was only working on one contract at a time.  Imagine how much more complicated this becomes in a service contract where the sub might be performing for several different contractors in a single day.

Is the New Statute Better?

While most would argue that clarity is better, there may be exceptions to that school of thought given the teeth in the new rules and the remaining potential for inadvertent noncompliance.  As one writer put it, contract performance cost may appear easy to predict at the beginning of a contract period:

but the status of a contractor’s cost percentages might well fluctuate during performance, because a change, a request for equitable adjustment, or a claim, whether by the prime or a subcontractor, could affect the cost outcome and delay a conclusive compliance determination until well after performance is complete. So on any given day a contractor may or may not appear to be on the road to compliance, but actual compliance might not be knowable until contract completion. 28 No. 8 Nash & Cibinic Rep. NL ¶ 45

That potential for change combined with the newly articulated penalties for noncompliance could create a lot of trouble for small contractors who are being awarded contracts because of their status, be it SDVOSB, small, HUB zone, woman owned, etc.  Under the 2013 statute, for which no rules have been promulgated, compliance is much easier to ascertain and the statute has teeth.  Penalties for non-compliance are much harsher and direct:

(g) Subcontracting limitations

(1) In general

Whoever violates a requirement established under section 657s [sub-contracting limitations] of this title shall be subject to the penalties prescribed in subsection (d), except that, for an entity that exceeded a limitation on subcontracting under such section, the fine described in subsection (d)(2)(A) shall be treated as the greater of–

(A) $500,000; or

(B) the dollar amount expended, in excess of permitted levels, by the entity on subcontractors.15 U.S.C.A. § 645 (West)

I don’t know about you, but neither I nor any of my current clients could take a half-million dollar hit to their bottom line as a minimum consequence for an inadvertent noncompliance with a subcontracting statute.

Where are the Rules?

Perhaps what is most alarming about the new statute is that neither the SBA nor the FAR council has promulgated rules, despite the law’s passage in both Houses of Congress in January 2013.  This fact adds to the confusion and frustration of government contractors.  As Ms. Styles, quoted above, put it in her testimony to Congress in 2014:

The problem, however, is the SBA’s failure to implement new regulations consistent with the new NDAA limitations on subcontracting statutory provision. A new contract (executed by a federal agency today) would contain the old regulation (FAR 52.219-14) which requires the contractor by contract term to ensure that ‘[a]t least 50 percent of the cost of contract performance incurred for personnel [is] expended for employees of‘ the small business prime contractor. The contract clause, however, does not exempt the small business prime contractor from also complying with the new NDAA statutory provision on limitations on subcontracting. Compliant and diligent small business are left in the position of implementing two inconsistent provisions, a statute that allows them to subcontract 50% of the amount they are paid and a contract clause which requires them to perform 50% of the cost of performance with their own employees.3 This inconsistency is adding millions of dollars to compliance costs for small businesses. Statement of Angela B. Styles, Partner Crowell & Moring LLP Committee on House Small Business Subcommittee on Contracting and Workforce July 15,2014 (2014 WL 3421941, 2014 WL 3421941)

I agree with Ms. Styles that the lack of rulemaking on the part of the SBA and the FAR council creates unnecessary and burdensome ambiguity in the contracting process for both the contractor (small and large) and the contracting officer.  The new statutes create penalties that could break many small businesses, which is presumably the opposite of Congress’s intent.  The statute gave the SBA 270 days to promulgate the rules.  More than two years later, that has still not happened.

I welcome your feedback, as always.

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