On October 2, 2013, Small Business Administration (SBA) published a final rule to establish and revise rules and procedures pertaining to small business set-asides, partial set-asides, multiple award contracts (MACs), task and delivery orders, bundling and consolidation. 78 Fed. Reg. 61,114 (Oct. 2, 2013). The revised regulations implement specific changes required by the Small Business Jobs Act of 2010 (Jobs Act). Pub. L. No. 111-240 (2010). As detailed hereafter, these changes create greater opportunities for small businesses to compete as prime contractors.
The negative effects of “bundling” on small businesses have long been recognized by the government contracts community. Bundling refers to the consolidation of two or more requirements that were previously provided under separate smaller contracts. 13 C.F.R. § 125.2(d). When smaller requirements are bundled, the resulting larger contracts are often unsuitable for a small business. Id. The Jobs Act attempts to alleviate such negative impacts by providing small businesses and procurement officials with the necessary tools for meeting agency mission requirements while achieving small business contracting objectives. For instance, the new rules permit small businesses to form Small Business Teaming Arrangements (SBTAs) that can compete for bundled contracts without running afoul of SBA’s size and affiliation rules. At the same time, the new regulations contain flexible rules and procedures for establishing small business set-asides.
As noted, one of the most significant changes under the revised regulations is the express recognition of SBTAs. According to the new regulations, an SBTA is defined as “[t]wo or more small business concerns . . . formed [as] a joint venture to act as a potential prime contractor.” 13 C.F.R. § 125.1(u)(1). Additionally, “[a] potential small business prime contractor [may] agree with one or more other small business concerns to have them act as its subcontractors under a specified Government contract.” Id. § 125.1(u)(2). As a result of these changes, small businesses can avoid the legal complexities and administrative burdens of forming joint ventures to compete for large, complex contracts. Instead, the only requirements for forming an SBTA are that the agreement must be in writing and all team members must be categorized as small per the applicable size standard.
Section 1331 of the Jobs Act, as promulgated by the SBA’s new rules, encourages the use of MACs, including GSA Multiple Award Schedules, multiple-award Indefinite Delivery/Indefinite Quantity contracts, and multiple-award task or delivery order contracts. The new regulations provide agencies with guidance on when MACs (including orders) may be set aside, partially set aside or reserved for small businesses.
With respect to partial set-asides, the new rules state that contracting officials may partially set aside MACs when (1) market research indicates that a total set-aside is not appropriate; (2) the procurement can be broken up into smaller discrete portions or categories; and (3) two or more small business concerns are expected to submit an offer on the set-aside portion(s) of the requirement at a fair market price. 13 C.F.R. § 125.2(e)(3)(i). Similarly, contracting officers may reserve one or more MAC awards for small business when market research and recent experience indicate that at least two small businesses could perform part of the requirement, but the contracting officer could not divide the requirement into smaller discrete portions. Id. § 125.2(e)(4)(i)(A). Alternatively, a MAC may be reserved if at least one small business can perform the requirement but there is not a reasonable expectation of receiving at least two small business offers. Id. Finally, the SBA’s new rules permit contracting officers to set aside individual task or delivery orders for MACs that were awarded under full and open competition. Id. § 125.2(e)(6).
Another important change pertains to the Limitations on Subcontracting (LOS) Rule that applies to MACs. 13 C.F.R. § 125.6. Colloquially referred to as the “50% rule,” the LOS Rule applies to small business set-asides and requires that small business prime contractors incur at least 50% of the costs of performance (in most cases). Under the revised regulations, small businesses are still required to perform the required percentage of work, but the requirement can be met through the aggregate efforts of an SBTA. Id. § 125.6(i). In addition, with respect to measuring compliance with the LOS Rule, the revised SBA regulation provides that, generally, the period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period. The regulation notes that the contracting officer has discretion to apply the requirement to an order. Id. § 125.6(f). And in the case of orders set aside under a full and open contract or a full and open contract with reserve, contractors must comply with the LOS Rule during the performance of each order. Id.
The changes with respect to the LOS Rule are not entirely consistent with recent legislation. Section 1651(a) of the National Defense Authorization Act for 2013 (NDAA) measures results under the LOS Rule based on amounts paid to the concern, while the new SBA rule continues to measure the old way, based on cost of performance. The SBA has not begun the rule-making process to implement these and the other regulatory changes that the NDAA requires. We will update our clients regarding any additional developments resulting from implementation of the NDAA.
While additional changes may be forthcoming, the SBA’s new rules implementing the Jobs Act have created new opportunities for small businesses to compete for complex work. Please contact counsel for a more detailed summary of the final rule or analysis on how this change may impact your company.