As we’ve covered, the U.S. government sets defined goals concerning the percentage of federal contracting dollars that must go to small businesses. This situation can be a double-edged sword for small business contractors. On one hand – more contracts, more work, and more money are up for grabs. But, on the other hand, sometimes small businesses are awarded contracts too large to perform using only their own resources.
Often, the simple solution is for the small business to subcontract some of the work to others (even a large business). However, there are specific limitations on subcontracting to prevent a small business from subcontracting out too much of the work. The limitations on subcontracting (which apply to certain full or partial small business set-aside contracts, including 8(a) and Women-Owned Small Business contracts) are set out at 13 C.F.R. 125.6, including different requirements for self-performance based on industry:
• In the case of a contract for services (except construction), the small business concern will perform at least 50 percent of the cost of the contract incurred for personnel with its own employees.
• In the case of a contract for supplies or products (other than procurement from a non-manufacturer in such supplies or products), the concern will perform at least 50 percent of the cost of manufacturing the supplies or products (not including the costs of materials).
• In the case of a contract for general construction, the concern will perform at least 15 percent of the cost of the contract with its own employees (not including the costs of materials).
• In the case of a contract for construction by special trade contractors, the concern will perform at least 25 percent of the cost of the contract with its own employees (not including the cost of materials).
One of the common challenges for small business trying to comply with 125.6’s limitations on subcontracting is figuring out what it means to self-perform. For example, the Court of Federal Claims recently ended a long saga – including protests to the GAO and SBA – over whether an individual included in the awardee’s proposal was an employee of the small business (and therefore counted towards the self-performance requirement) or a “1099” independent contractor (not counted towards the requirement).
The conclusion in the case (denying the protest because the individual was determined to be an employee) is less important for our purposes than the big picture takeaway. Small businesses must be mindful of the limitation on subcontracting when bidding on set-aside procurements – and must make sure to follow through on complying with those requirements after the contract is awarded.
One closing thought – subcontracting also carries the potential hazard of affiliation. Subcontracting to contractors that present an indication of affiliation can threaten your small business size status altogether! Please refer to our article for tips on how to identify the risks and avoid affiliation on small business set-aside contracts.