New FAR Rule Clarifies Limitations on Subcontracting

The Federal Acquisition Regulation (FAR) Council issued amended FAR provisions, effective September 10, 2021, which address an inconsistency between the FAR and related Small Business Administration (SBA) regulations.

The FAR limits the percentage of work that a small business prime contractor can subcontract to large businesses if the prime contract has been awarded (i) pursuant to a solicitation set aside for small businesses expected to exceed $250,000 in value, or (ii) pursuant to any solicitation, regardless of value, set aside for a specific socioeconomic program (e.g., women-owned small business, service-disabled veteran-own small business, etc.).  By contrast, the SBA has historically allowed a small business prime contractor to satisfy these requirements by subcontracting with "similarly situated" entities, defined as having "the same small business program status as the prime contractor.”

A plain reading of the SBA definition of "similarly situated" indicates that a small business subcontractor must match the size and socioeconomic program statuses of the prime.  In response to public comments on its new FAR rule, however, the FAR Council has clarified that, for small business set-aside contracts that are not also set aside for a particular socioeconomic program, a small business prime may satisfy the subcontracting limits by partnering with any subcontractor properly qualified as a small business, without regard to socioeconomic status.

Understanding these types of requirements is critical for properly structuring teams to compete for, win, and successfully perform federal small business set-aside contracts.  If your business provides goods or services under a federal contract or have plans to do so in the future, and you have concerns about compliance with small business rules, please contact Bill Speros or another attorney at our firm.


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