In 2016, the Small Business Administration (SBA) updated its regulations pertaining to limitations on subcontracting. Five years later, on August 11, 2021, the Federal Acquisition Regulation (FAR) Council finally followed suit by publishing two final rules that largely mirror the SBA’s rules. This is a welcome development for federal contractors, as the discrepancy between the SBA rules and the FAR rules on limitations on subcontracting has been a source of unnecessary confusion for half a decade. This article provides a brief overview of the new FAR rules on limitations on subcontracting.

Revision of Limitation on Subcontracting

In the first final rule published by the FAR Council on August 11, 2021, the FAR Council made the following “significant changes” from its earlier proposed rule on limitations on subcontracting:

• The definition of “similarly situated entity.” The definition of “similarly situated entity” is revised at FAR 19.001 and in FAR clause 52.219-14, Limitations on Subcontracting. It now provides an example of entities having the same small business program status and specifies that the entity must be small under the size standard associated with the North American Industry Classification System (NAICS) code that the prime contractor assigned to the subcontract.

• Applicable dollar threshold. The final rule reflects the clarification that the nonmanufacturer rule and the limitations on subcontracting apply to set-asides and sole source awards made pursuant to FAR subparts 19.8, 19.13, 19.14, and 19.15, as well as awards using the HUBZone price evaluation preference pursuant to FAR subpart 19.13, regardless of dollar value.

• HUBZone price evaluation preference. Paragraph (e)(2) is added to FAR 19.507, Solicitation provisions and contract clauses, to clarify that, in solicitations and contracts using the HUBZone price evaluation preference, the contracting officer shall insert the clause at FAR 52.219-14, Limitations on Subcontracting. Paragraph (h)(1)(ii)(B) is added to specify that the contracting officer shall insert the clause at FAR 52.219-33, Nonmanufacturer Rule, in solicitations and contracts when the HUBZone price evaluation preference is used. For the FAR clauses at 52.219-14 and 52.219-33, the prescription also states that the contracting officer shall not insert the clause in the resultant contract if the prospective contractor waived the use of the price evaluation preference or is “an other than small business.”

The clause at FAR 52.219-4, Notice of Price Evaluation Preference for HUBZone Small Business Concerns, is revised to remove the proposed rule definition of “similarly situated entity,” and to delete (instead of revising) the now redundant paragraphs (d) and (e), which pertain to the limitation on subcontracting.

• Limitations on Subcontracting. FAR clause 52.219-14, Limitations on Subcontracting, is revised to clarify that this clause applies to contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. Additionally, to provide clarification on calculating the 50% limitation for contracts that include both services and supplies (i.e., “mixed contracts”), paragraph (e)(1) of the clause at FAR 52.219-14 is revised to specify that when a contract is assigned a NAICS code for services, the 50% limitation shall only apply to the services portion of the contract. Paragraph (e)(2) is revised to specify that when a contract is assigned a NAICS code for supplies, the 50% limitation shall only apply to the supply portion of the contract.

• Nonmanufacturer Rule. FAR clause 52.219-33, Nonmanufacturer Rule, is revised to clarify that the clause applies to contracts using the HUBZone price evaluation preference to award to a HUBZone small business concern unless the concern waived the evaluation preference. Paragraph (c)(2) is revised to remove text concerning an item for a kit that is not produced by small business concerns in the United States or its outlying areas.

• Revisions to include recent FAR changes. Prior to publication of this final rule, FAR part 19 and its associated provisions and clauses were substantially revised as a result of FAC 2020-05 (effective March 30, 2020). As a result, some revisions in the proposed rule are no longer included in this final rule, because the revisions have already been made to the FAR in FAC 2020-05. Other revisions appear in a different location due to the changed landscape of FAR part 19. The final rule also contains certain revisions that were not in the proposed rule due to changes made in FAC 2020-05.

Good Faith in Small Business Subcontracting

The second final rule published by the FAR Council on August 11, 2021 — which made no significant changes to the FAR Council’s earlier proposed rule regarding “good faith in small business subcontracting” — provides examples of “activities that contracting officers may consider when evaluating whether the prime contractor made a good faith effort to comply with its small business subcontracting plan.” The final rule also provides contracting officers with “consistent and uniform examples to identify and hold large prime contractors accountable for failing to make a good faith effort to comply with their subcontracting plans.”

In addition, the final rule “requires prime contractors with commercial subcontracting plans to include indirect costs, with certain exceptions, in their subcontracting goals.” According to the FAR Council, “[t]his will ensure that the data reported in the summary subcontract report is consistent with the goals in the commercial subcontracting plan.”

Effective Date

Both final FAR rules are effective September 10, 2021, which is “30 days after publication in the federal register” on August 11, 2021.