Subcontracting Compliance

As we previously wrote, the Federal Acquisition Regulation (FAR) limitations on subcontracting (LOS) rule was recently revised to more closely mirror the U.S. Small Business Administration’s (SBA) LOS regulation. However, because the changes to the FAR do not account for more-recent revisions to SBA’s LOS rule, inconsistencies between the two sets of regulations remain. Recognizing this disconnect, the Civilian Agency Acquisition Council has released a memorandum authorizing civilian agencies to issue FAR class deviations to better align the FAR’s and SBA’s LOS. In a welcome step towards regulatory conformity, the Department of Defense (DOD) has also acted to bridge the divide between these regulations. On September 10, 2021, DOD issued a class deviation (Deviation), effective immediately, that recognizes certain exclusions from the LOS for small businesses that are outlined in SBA’s regulations but have not yet been added to the FAR. This Deviation should provide greater clarity for small businesses when measuring compliance with the LOS under DOD set-aside contracts.

SBA’s LOS rule provides that, for service contracts (except construction), prime contractors may not pay more than 50% of the amount paid to them by the government to firms that are not similarly situated. Critically, the SBA rule provides that the following services may be excluded from the 50% limitation: (1) other direct costs (to the extent they are not the principal purpose of the acquisition and small business concerns do not provide the service), such as airline travel, work performed by a transportation or disposal entity under a contract assigned the environmental remediation North American Industry Classification System code (562910), cloud computing services, or mass media purchases; and (2) work performed overseas on awards made pursuant to the Foreign Assistance Act of 1961 or work required to be performed by a local contractor. These exclusions are not in the FAR.

However, as explained in the Deviation, DOD is now requiring that all contracting officers use a revised version of the FAR’s LOS clause that expressly recognizes the foregoing exclusions from the 50% limitation for services contracts. The Deviation will remain in effect until incorporated into the FAR or until otherwise rescinded.

If you have any questions regarding the Deviation or the LOS, please contact Sam Finnerty, the author of this blog, or a member of PilieroMazza’s Government Contracts Group.