SBA Issues Final Rule Regarding Affiliation, Calculation of Annual Receipts, Limitations on Subcontracting, and Joint Ventures

In its Final Rule issued May 31, 2016, the Small Business Administration issued rules implementing the 2013 National Defense Authorization Act. The Final Rule has a myriad of aspects applicable to awards in various small business programs, and this short summary is not intended to address them all; but rather instead this summarizes some of the provisions regarding affiliation, calculation of annual receipts, limitations on subcontracting and joint ventures.

Affiliation:
The Final Rule expressly allows certain arrangements without establishing affiliation, while precluding others subject to rebuttable presumptions; including:

• Small Business Teaming Arrangements are allowable without regard to affiliation for “bundled contracts” so long as each team member is small for the size standard assigned to the contract or subcontract.
• Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed affiliated if they conduct business with each other or share or provide loans, resources, equipment, locations, or employees; although the presumption can be overcome by showing clear lines of fracture between the concerns.
• SBA may presume identity of interest based on economic dependence if 70% or more of receipts over the previous 3 fiscal years are derived from another concern; although
• the presumption is rebuttable by showing lack of sole dependence; and
• business concerns owned and controlled by an Indian Tribe, ANC, NHO, CDC, or wholly owned entities of an Indian Tribe, ANC, NHO, or CDS, are not considered affiliated by another concern owned by that entity based solely on the contractual relationship between the two concerns.

Calculation of Annual Receipts:
The Final Rule defines how SBA will calculate annual receipts when determining size. In short, receipts include all revenue (including passive income) from whatever source received or accrued; generally meaning the concern's total income (or gross income for sole proprietorships) plus the cost of goods sold as defined and reported to the IRS. Exclusions are identified in the Final Rule.

Limitations on Subcontracting:
Compliance is now determined by a percentage cap on the total amount of the prime contract paid to first tier subcontractors that are not “similarly situated” entities, instead of the previous limitation based on  costs. A similarly situated entity is a small business that participates in the same SBA program that qualified the prime contractor as an eligible offeror.

There is no requirement to apply the prime contract NAICs code to subcontracts. Instead, the prime contractor assigns the code applicable to the scope of work on each subcontract. The percentage limits set by statute are:

• 85% for general construction contracts;
• 75% for specialty trade construction contracts; and
• 50% for service and supply contracts.

The method for calculating compliance with the limitations is complex, depends on whether the contract is for construction, supplies or services, or mixed supplies and services. Among other things, the cost of materials is typically not included, and there are exceptions when “nonmanufacturers” supply the product of a domestic small business manufacturer or processor.

While work done by a similarly situated first tier subcontractor does not count toward the limitations, any work that a similarly situated subcontractor further subcontracts will count towards the limitation.

Joint Ventures: 
The Final Rule allows a joint venture to qualify as small for any government procurement when each partner to the joint venture qualifies individually as small under the size standard corresponding to the NAICS code assigned by the government in the solicitation.

Recertification:
Under this Final Rule, when an acquisition or merger occurs after the offer date but prior to award the offeror must recertify its size to the contracting officer prior to award.

This article is for educational purposes only and is not intended as legal advice. For more information about this or other construction or government contracts topics, please contact the authors of this article, Neil Lowenstein and Mike Sterling, or any of the other members of the Vandeventer Black Construction and Public Contracts Law Team at www.vanblacklaw.com.