On December 18, 2012, the House and Senate released the Conference Report for the National Defense Authorization Act for Fiscal Year 2013 (“2013 NDAA”). In addition to authorizing the Department of Defense budget and expenditures, the 2013 NDAA will clarify requirements that limit subcontracting under small business subcontracts, provide small businesses the opportunity to limit liability associated with misrepresentation of small business status, and tighten requirements for agencies to establish and meet annual small business contracting goals.
Limitations on Subcontracting
Most small business contractors are aware that the total amount of work that may be subcontracted under a small business prime contract is limited. These statutory limitations are implemented by FAR 52.219-14, Limitation on Subcontracting. The following table highlights the differences between the operative language used in the current FAR clause and the operative language used in the 2013 NDAA with respect to the requirements for limitations on subcontracting.
Type of Contract
Current FAR 52.219-14
| At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.
If awarded a contract under section 8(a), 8(m), 15(a), 31, or 36, a covered small business concern –
(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.
(2) in the case of a contract for supplies (other than from a regular dealer in such supplies), may not expend on subcontractors more than 50 percent of the amount, less the cost of materials, paid to the concern under the contract.
(other than procurement from a nonmanufacturer 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.|
As the table shows, the 2013 NDAA language will require the small business prime contractor to use the “amount paid to the concern” or the “amount, less the cost of materials, paid to the concern” to comply with the limitation on subcontracting requirements for applicable services and supply contracts. This language provides clearer instructions for small business contractors than the language used in the current FAR clause.
The 2013 NDAA further clarifies the limitation on subcontracting requirement for “mixed” contracts that involve provision of both services and supplies (which is not addressed in the current FAR clause). For such contracts, the 2013 NDAA provides that the small business prime contractor:
(A) shall determine for which category, services . . . or supplies, the greatest percentage of the contract is awarded;
(B) shall determine the amount awarded under the contract for that category of services or supplies; and
(C) may not expend on subcontractors, with respect to the amount determined under subparagraph (B), more than 50 percent of that amount.
Section 1651, 2013 NDAA, H.R. 4310. Under this three-step requirement, the small business prime contractor must ensure that the total amount subcontracted does not exceed 50% of the amount awarded for the category determined by the contractor to represent the greatest percentage of the contract.
The 2013 NDAA also clarifies that any amounts expended on subcontractors that are also small businesses (“similarly situated entities”) are not considered subcontracted for the purpose of determining compliance with the subcontracting limitations.
Limitation of Liability
A contractor may be subject to fines, imprisonment, suspension and debarment, and other administrative remedies if it has misrepresented its small business status to obtain a federal government prime or subcontract. See 15 U.S.C. § 645(d). However, the 2013 NDAA provides that 15 U.S.C. § 645(d) will not apply:
. . . if the defendant acted in good faith reliance on a written advisory opinion from a Small Business Development Center (as defined in this Act), or an entity participating in the Procurement Technical Assistance Cooperative Agreement Program defined in chapter 142 of title 10, United States Code; however, nothing in this Act shall obligate either entity to provide such a letter nor shall the provision of such a letter in any way render the providing entity liable to the business concern should the Administrator later determine that the concern is not a small business concern.
Section 1681, 2013 NDAA (emphasis added).
Under this new provision, a small business contractor may request a written advisory opinion from either a Small Business Development Center or an entity participating in the Procurement Technical Assistance Cooperative Agreement Program to limit its potential liability. However, these entities are not required to provide the written advisory opinion. The 2013 NDAA requires the Small Business Administration (SBA) to issue regulations within 270 days of enactment of the NDAA to further define what constitutes an adequate advisory opinion for purposes of this limitation of liability provision.
Agency Goals for Small Business Contracting
The 2013 NDAA also tightens requirements for agencies to establish and meet annual small business contracting goals. The current government-wide small business contracting participation goal is 23% of all prime contract awards for each fiscal year. See 15 U.S.C. § 644(g). Under current requirements, each agency must develop an annual “goal” that it intends to meet for small business contracting. However, agencies are not required to separately address prime and subcontract goals and are not required to develop plans for achieving their goals.
The 2013 NDAA will require that agencies separately address their annual goals at both the prime and subcontract level. Additionally, the 2013 NDAA will require agencies to “develop a plan for achieving such goals . . . which shall apportion responsibilities among the agency’s acquisition executives and officials.” Section 1631, 2013 NDAA. These provisions will likely improve agency accountability and potentially assist the agencies in meeting their annual small business contracting goals.