Proposed rule changes would align the Federal Acquisition Regulation with SBA regulations on subcontracting limitations, among other clarifications

After several years of disjointed regulations between the Small Business Administration ("SBA") and the Federal Acquisition Regulation ("FAR") related to the limitations on subcontracting, revised FAR regulations are on the horizon to correct this issue. On January 17, 2024, the government issued a notice regarding proposed rule changes to implement rule changes made by the SBA in 2016, 2019, and 2020, including FAR 52.219-14 and its underlying regulation. This includes modifying the language of the FAR to update the limitations on subcontracting, the nonmanufacturer rule, and to standardize these requirements across the small business programs. Comments for these proposed changes closed on March 18, 2024, allowing for finalization of the rule following consideration of any comments.

Timing for the revised rule will depend on the number and content of any comments received to the proposed rule. However, as the revisions to the SBA regulations prompting these changes to the FAR were confirmed through the rulemaking process years ago, it is possible the comments to this proposed change will be less substantive. According to the Federal Register website, only seven comments were submitted.

Proposed Changes to the Federal Acquisition Regulation (FAR)

The proposed changes are designed to conform FAR 19.505, which underlies the contract clause at FAR 52.219-14, to the SBA's regulations set forth at 13 CFR 125.6. These changes include:

• Confirming only one of the limitations on subcontracting apply to a contract;
• Permitting the exclusion of other direct costs that are not principal to the purpose of the contract when calculating the limitations on subcontract requirements for a service contract;
• Clarifying the limitations on subcontracting related to general construction or specialty trade contractors when the contract also includes supplies and/or services;
• Clarifying that any work that a similarly situated entity subcontractor further subcontracts out will count towards the prime's limitations on subcontracting;
• Implementing 13 CFR 124.510 to eliminate the unique requirements of the limitations on subcontracting and the nonmanufacturer rule for 8(a) contractors; and
• Removing the standard for kit assemblers and applying the policy at FAR 19.505(c)(4) to multiple item acquisitions, as well as implementing the regulations at 13 CFR 121.406(c) and 13 CFR 121.406(e).

Notably, the proposed rule change did not include modifying the FAR to include the language of 13 CFR 125.6(f)(3), which modified the SBA's definition of independent contractors. Currently, FAR 52.219-14 Limitations on Subcontracting defines "independent contractors" as follows: "An independent contractor shall be considered a subcontractor." However, in late 2019, the SBA issued several new and modified rules to implement provisions of the National Defense Authorization Acts of 2016 and 2017. This rule, effective December 30, 2019, included a clarification on the classification of independent contractors:

For contracts where an independent contractor is not otherwise treated as an employee of the concern for which he/she is performing work for size purposes under § 121.106(a) of this chapter, work performed by the independent contractor shall be considered a subcontract. Such work will count toward meeting the applicable limitation on subcontracting where the independent contractor qualifies as a similarly situated entity.

13 CFR 125.6(f)(3)

At the time, the SBA explained it would not be fair to find an independent contractor is an employee for size purposes and then, at the same time, find that an independent contractor is a subcontractor for the limitations on subcontracting. Given the revisions to the FAR, which have taken several years to effectuate, do not mention this part of the regulation, it is unlikely that the FAR will be updated to include this clarification anytime soon.

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