Handyman Insurance, Similarly Situated Entities
One of the most talked about elements of the new rule is the fact that subcontracts made to “similarly situated entities” are not counted towards the applicable subcontracting limit. The NDAA defined a similarly situated entity as “a small business subcontractor that is a participant of the same small business program that the prime contractor is a certified participant and which qualifies the prime contractor to receive the award.” In other words, a HUBZone could subcontract to another HUBZone, or an 8(a) could subcontract to another 8(a), without counting those subcontracts towards the applicable limit.
In its 2014 proposed rule, the SBA proposed that a subcontractor had to be “small” for purposes of the NAICS code assigned to the prime contract in order to fall within the definition of “similarly situated entity.” In the final rule, however, the SBA has departed from that idea; under the new regulation, a subcontractor may qualify as a “similarly situated entity” so long as it is “small” under the NAICS code assigned to the subcontract, regardless of whether the subcontractor is “small” for purposes of the prime contract’s NAICS code. Because prime contractors – and not the government – are responsible for assigning NAICS codes to their own subcontracts, this provides a lot more flexibility. (Of course, primes will have to remember to assign NAICS codes to their subcontract, something they often forget to do currently.)
The NAICS code shift is not the only change regarding “similarly situated entities” that occurred between the proposed rule and final rule. Under the proposed rule, the SBA required the prime contractor and any “similarly situated” subcontractors to execute written “teaming” agreements containing certain mandatory provisions. However, because the written agreement requirement was heavily criticized during the comment period, it was removed from the final rule. The new rule does not require written agreements between primes and their “similarly situated” subcontractors.
During the comment period, questions were raised about how these concepts would be applied to lower tier subcontractors. More specifically, people were concerned that if compliance was determined by looking at first tier subcontractors only, a first tier “similarly situated” subcontractor could in turn pass all of its performance on to a large or otherwise not similarly situated entity through a second subcontract, thus circumventing the regulation entirely. To address these concerns, the SBA explained in the final rule that:
SBA will apply the limitations on subcontracting collectively to the prime and any similarly situated first tier subcontractor. . . any work performed by a similarly situated first tier subcontractor will count toward compliance with the applicable limitation on subcontracting. Any work that a similarly situated first tier subcontractor subcontracts, to any entity, will count as subcontracted to a non-similarly situated entity for purposes of determining whether the prime/sub team performed the required amount of work. In other words, work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count as subcontracts performed by non-similarly situated concerns.