A Key New Provision on Subcontracting in the 2013 NDAA

The new 2013 National Defense Authorization Act (NDAA) will direct agencies to hold relevant senior executives accountable for meeting small-business goals. For example, it will elevate the reporting of the Director of the OSDBU within each agency by requiring direct reporting to the head of the agency.

With its many provisions, the new 2013 NDAA will increase transparency and accountability to ensure small-business contracts are actually benefitting those small businesses for which the contracts are set-aside.

One way Congress is attempting to do that is with major changes to the limitations on subcontracting rules for small business government contractors.

The new NDAA contains an important change to the way small businesses can qualify for set-aside contracts when they are teaming with large businesses.

It used to be that small businesses had to do 50% of the labor (personnel costs) on any contract that was designated as set-aside for small business set-aside. This new act makes it 50% of the total cost of the job. The total costs could obviously include a significant amount of other costs (supplies, etc.). That makes a big difference.

Small businesses will now need to break down their own costs (and those of their subcontractors) to determine which costs are personnel-related and which are not – a process that is very difficult when the sub does not share its cost breakdown.

For example, let’s say I’m paving a parking lot and I want to sub out the work to a big paving company. So part of my costs will be the actual paving materials. I can sub that work out and under the old deal the cost of that pavement wouldn’t count under the portion I had to do myself as the small business.

Under the new deal, though, it does count. If the cost of the stuff plus the personnel costs of the sub ends up being 75% of the total work, leaving my small business doing only 25%, that will no longer be in compliance with the set-aside regulations.

This limits the amount of work small businesses can sub out while still being compliant to the regulations for qualifying for the set-aside status. Some small businesses may not like this change, and not being able to exclude these other direct costs (ODCs) from their sub’s compliance numbers.

This does, interestingly, mean that many small businesses will have to perform more prime contract work. Likely, this is what was intended, that at least 50% of the amount paid by the government on set-aside contracts go to small businesses.


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