How NDAA 2014 Will Affect Small Business Contractors

Loophole rope knot

Without certain loopholes in place, will large businesses bring less work to the small business set-aside process?

The 2014 National Defense Authorization Act (NDAA) law contains two provisions to help small businesses contractors. But will they hurt more than they help?

The first issue was that the Small Business Act (passed in 2010), had some differences with the way the Defense Department was implementing small business set-asides, which was allowing large businesses to be subcontractors in a way that was not consistent with the definitions in the Small Business Jobs Act and the NDAA of 2013 (we discussed this subcontracting provision in an earlier post).

So while this may seem obscure, the issue is that in certain circumstances, even a small business set-aside could leave the large subcontractor doing the vast majority of the work. With the 2014 NDAA, Congress has directed the Defense Department to do it the SBA way, not the way that was embodied in the Defense FARs (DFARs).

This forces small businesses to do more of the work when they win a set-aside contract, rather than just “pass it through” to a large business, which was sort of a sham (maybe a shame as well). But overall, this could be a double-edged sword if large businesses bring less work to the small business set-aside process, now that they can’t use these loopholes any more.

Another measure, meant to enhance opportunities for small businesses, allows an incentive for prime federal contractors to consider small firms when they are subcontractors to their 1st tier subcontractors, even if large business. This is very dangerous and let me illustrate why:

Let’s say Big Biz #1 has a requirement to sub out 23% to small businesses on their new contract. They’ve also given Big Biz #2 another 25%, and kept the usual >50% for them selves. Now Big Biz #2 brings in Small Biz #1 as a sub, doing 10% of their work (this might be a building maintenance vendor, or any of a number of service activities).

But now Big Biz #1 gets a credit for the subcontract to Big Biz #2 (10% of 25% = 2.5%), so only 20.5% needs to go to small businesses as 1st tier subs (23% – this new 2.5%). This can easily result in some games being played, whereby I now give Big Biz #2 their 25% + 2.5% = 27.5%.

Big Biz #2 gets a bigger share and everyone is happy, except less direct work is being done by small businesses. This could lead to some interesting anomalies, especially in revenue – Big Biz #2 could literally get 50% of the revenue, give 46% to Small Biz #1, and no direct sub to Big Biz #1 is a small business!

To me, this is not a good thing, and will hurt reporting as well.

You can read more about NDAA provisions on the Fierce Government blog at: