July 08, 2017 Procurement Lawyer

Limitations on Subcontracting: Regulatory Disconnect Leaves Small Businesses in an Untenable Situation

by Zachary Prince & Kristin Tisdelle

Zachary Prince is a senior associate with Smith Pachter McWhorter PLC, and Kristin Tisdelle is a junior associate with Smith Pachter McWhorter PLC.

Small business owners are in a difficult position.

Small business owners are in a difficult position.

Small businesses competing for or performing set-aside contracts are caught in a difficult position because of delays in statutory implementation by the FAR Council, which follow delays in statutory implementation by the Small Business Administration (SBA). The Federal Acquisition Regulation (FAR) provides a specific formula, included in a mandatory clause for all small business set-aside solicitations and contracts, to be used in evaluating whether a small business complies with subcontracting limitations.1 The Court of Federal Claims has held that this clause is a material portion of the contract, which may mean that contractors that violate the clause can be terminated for default.2 Further, without weighing in on the validity of the charge, the Department of Justice has pursued contractors under the False Claims Act for violating this clause.3 The statute imposes hefty penalties for violations,and the SBA considers violation of the subcontracting limitations to be potential grounds for debarment.5

The difficulty for contractors is that Congress changed the limitations on subcontracting in early 2013 as part of the 2013 National Defense Authorization Act (NDAA). The SBA modified its regulations to sync with the statute, as well as to clarify a few questions left unaddressed by the new law. However, more than four years later, the FAR still does not implement the statute. While the FAR Council apparently approved a draft interim rule in late March 2017, no such rule has been published in the Federal Register.6 Even a conforming change will not remedy the problem for contracts that contain the old provision, and it might not address the problem for solicitations that contain the old provision.

In the meantime, as general guidance subject to qualification depending on the circumstances, contractors should comply with both the FAR and the statute or potentially risk significant penalties. In this article, we explore (1) the previous regulatory framework, (2) issues that arose under the earlier framework, (3) the statutory change, (4) issues that arise as a result of the current discrepancy between the statute and the regulations, and (5) suggested guidance for contractors in light of the regulatory confusion.

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