Important Limitations on Subcontracting You Need to Know

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Subcontractors to a company, contracting agency or working with an individual have limitations in what work may be completed based on the current laws and what statutes permit in singular states. Some of these changes are implemented by Congress such as the National Defense Authorization Act with several alterations with entities and prime contractors.

Prime contractors are able to take credit when any work performed by subcontractors in similar situations is completed. This is less work spent on subcontractors for various projects and shifts it more to prime contractors and companies. Only so much work may be performed by subcontractors when a small business is involved. The limitations placed on subcontractors and those that work for contracting agencies as subcontractors permit small businesses to further work and revenue. Awards are provided to prime contractors over subcontractors based on business development programs. Penalties are issued when similarly situated entities are benefiting through awards that should go to subcontractors.

Some limitations are bypassed by the first subcontractor passing performance onto a larger or second subcontractor that is not similar situated as he or she or the prime contractor. The specifics of these circumstances may change based on laws and statutes implemented in different years. Any work that is performed by a subcontractor no matter who the work is eventually completed by counts unless the other is not similarly situated in business. This may lead to small business subcontractors passing work to larger companies or corporations so that other employees are able to permit a bypass of these limitations imposed on subcontractors.

Written Agreements

The prime contractors are still able to make use of subcontractors and agencies, but this is better through written teaming agreements that have provisions for mandatory requirements within them. This is for the prime contractors and the similarly situated subcontractors in entities or that are individual. This may not affect larger companies and corporations when there is a written teaming agreement with small business subcontractors. The similarly situated company or entity has been in place for many years, and the written agreement is to provide for evidence between the two parties of a policy and agreement in writing.

The Small Business Administration also has changed the proposed rules to provide for small businesses and larger companies in there being no necessity for the similar situated entity to be a small agency or company. However, it could be considered small in comparison to the prime contractor. This then leads to some subcontracting entities being similarly situated even if they are larger than is standard under the standard rules already in place. The limitations are more flexible when the two entities are close in size for contracts, projects and programs. The similarly situated subcontractor has a small business program just as the prime contracting entity.

Application of Limitations

Both service and supply calculations and formulas are connected to the limitations for small business contractors and subcontractors. This is to ensure compliance with these entities. For services, this means a shift from labor costs to the amount that is paid. For supply contracts, this is a cost of manufacturing as has been used previously to the same amount paid calculation. This new rule means that being awarded a small business contract with at least a value of $150,000 and greater, the owner of the company must in service contracts pay no more than half of the amount paid by the government to the company is not for similarly situated entities. The subcontractor may only account for 50 percent of the work even if subcontracted to another firm.

The limitations as applied to supply or product contracts are similar with the 50 percent and no more for similarly situated entities. The work cannot be performed above this capacity with subcontractors, other subcontractors involved by them or other persons working in the same capacity. However, the costs of materials are not a consideration in these matters. Nonmanufactured rules may apply differently based on certain factors. It is vital that the business owner adheres to these rules when he or she has a small business or is part of the SBA to ensure compliance is not violated and penalties enacted.

Legal Support with Subcontracting Limitations

It is vital that a business lawyer is hired for the changes and alterations of subcontracting work and services. If these changes are violated, it is possible the company could lose out on business or a government contract in the future for these offenses.


Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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