On December 23, 2020, the Department of Veterans Affairs (VA) issued a class deviation to implement the Small Business Administration’s (SBA) formulation of the limitations on subcontracting (LOS) and nonmanufacturer rule (NMR) for all VA contracts awarded to small businesses or under SBA socioeconomic programs. SBA’s formulation is outlined in its May 31, 2016, final rule. The VA’s class deviation follows the release of a Civilian Agency Acquisition Council (CAAC) letter, which authorized civilian agencies to issue such class deviations to promote regulatory conformity. The class deviation requires VA contracting officers to use specified alternate clauses in all set-aside procurements. For all VA procurements, SBA’s formulation of the LOS and NMR now governs, at least until the Federal Acquisition Regulation (FAR) is updated to conform to SBA’s rule changes.

For years, contractors have been uncertain about which LOS calculations should apply to their contracts—the FAR’s or SBA’s. The old formula still found in the FAR calculates compliance based on the prime contractor’s cost of personnel. SBA’s new formula follows a calculation based on total contract revenues. The SBA formulation also recognizes the much-publicized concept of counting work performed by “similarly situated” entities towards LOS compliance.

Like the VA, other agencies have issued class deviations to adopt SBA’s version of the LOS and NMR. On November 6, 2020, the Department of Defense released a second revision of its class deviation. And, since the publication of the CAAC letter, the Department of Energy and the General Services Administration have issued their own class deviations, which are available here and here.

As of January 6, 2021, the FAR Council is preparing a final rule for publication that should conform the FAR’s LOS clause to the SBA LOS rule. Once the rule is published, individual class deviations will no longer be necessary to ensure regulatory compliance. Until then, class deviations like the VA’s will continue to have a significant impact on the small business community.

Special thanks to Firm Paralegal, Emmanuel Elone, for his assistance with this post.