The Small Business Administration (SBA) has issued the final rule, which is effective June 30, 2016, to implement provisions of the National Defense Authorization Act of 2013, which pertain to performance requirements applicable to small business and socioeconomic program set-aside contracts and small business subcontracting. This rule also amends SBA’s regulations concerning the non-manufacturer rule and affiliation rules. Further, this rule allows a joint venture to qualify as small for any government procurement as long as each partner to the joint venture qualifies individually as small under the size standard corresponding to the NAICS code assigned in the solicitation.

So a LOT is happening in this one final rule and for many contractors it may be worth reading the entire document using the link in the first paragraph.  Here are some key points of the final rule:

Limitations on Subcontracting (LOS) – Section 1651 of the NDAA changed the formula for calculating the LOS under all types of small business set-aside contracts.  This was done primarily to change the formula from being based on contract costs to one based on contract value. The final rule states that compliance will be determined by a percentage cap on the total amount of the prime contract that may be paid to subcontractors. So the final rule changes the approach, but not the basic percentage limits. For service and supply contracts small business prime contractors, no more than 50 percent of the total amount paid under the prime contract can be paid to subcontractors. For general construction contracts, the percentage is 85 percent, and for specialty trade construction, the percentage is 75 percent. Amounts paid to “similarly situated” entities are not considered “subcontracted” work for purposes of complying with the limitations on subcontracting requirement and are excluded from the limitation.

Similarly Situated Subcontractors – the final rule clarifies that a small business prime contractor need not include the amounts subcontracted to a “similarly situated” subcontractor in determining the subcontracted percentage allowed.  This would include another business concern that falls into the same size or socioeconomic category for purposes of set-aside contracts.  The exception for similarly situated subcontractors applies to all four types of contracts described in FAR 52.219-14 (services, supplies, construction and specialty trade).

Independent Contractors – the final rule clarifies that individuals classified as “independent contractors” by the Internal Revenue Service (IRS) (“1099″ personnel) will be considered subcontractors and may count toward meeting the applicable limitation on subcontracting when the independent contractor qualifies as a similarly situated entity.

Mixed Contracts/Cost of Materials – The final rule includes the term “mixed contract” to describe a contract that combines services and supplies. The CO must select the “single NAICS code which best describes the principal purpose of the product or service being acquired.”  So for mixed contracts that are predominantly services oriented (and a corresponding service related NAICS is attached), “the limitations on subcontracting for a services contract apply only to the services portion of the contract…” then any ‘‘cost of materials’’ are not part of the services to be provided through the contract and, thus, are excluded from the limitations on subcontracting analysis on that basis.  Additionally, the “cost of materials” is excluded from the subcontracting limitations in prime contracts for supplies, construction or specialty trade.

Affiliation – affiliation is presumed between firms owned and controlled by married couples, parties to a civil union, parents and children, and siblings.  Additionally, affiliation will also be presumed upon economic dependence if the qualifying small business concern derived 70 percent or more of its receipts from another concern in the previously completed fiscal year. The final rule exempts transactions between businesses owned by Alaska Native Corporations (ANC), Tribes or Native Hawaiian Organizations (NHO) and sister companies from this presumption of affiliation.

Joint Ventures -The final rule removes provisions limiting joint venture opportunities to only bundled or large procurements. So the exception from affiliation for small business joint ventures applies to any contract regardless of dollar amount.

Recertification – The final rule clarifies that a concern with a pending proposal on a set-aside contract must recertify its size for that pending proposal if it undergoes a merger or acquisition event.

Non-Manufacturer Rule (NMR) – The NMR requires the prime contractor to either manufacture the items itself or acquire them from another small business for small business set-aside contracts for manufactured items.  The final rule authorizes a waiver of the NMR for an individual contract award after a solicitation has been issued as long as all potential offerors are provided additional time to respond.  The final rule classifies unmodified, commercially available software under NAICS code 511210, Software Publishers, as an item of supply instead of a service. This change means that the non-manufacturer rule applies to procurements for this type of software.

So as I said, there’s a lot going on with this final rule.  If you are ever unsure, contact the CO or your local SBA office.  These are not regulations that you want to be unclear on as they can significantly affect small businesses in the federal market.