February 21, 2015 Zack Sionakides no responses

Tactics When Subcontracting to Similarly Situated Entities on Federal Contracts – Part II

As I noted in Part I of the series (https://www.linkedin.com/pulse/tactics-when-subcontracting-similarly-situated-part-zack-sionakides), Section 1651 of the 2013 National Defense Authorization Act (NDAA) made significant changes to the way that limitations on subcontracting are calculated and authorized similarly situated subcontracting in federal set-aside contracts. The main change was allowing small and disadvantage businesses to subcontract with similarly situated entities without it counting toward FAR 52.219-14, Limitation on Subcontracting. Put simply, as long as the subcontractor is the same type entity as the prime contracting entity (e.g. SB, VOSB, 8(a), WOSB, SDVOSB, HUBZone), their subcontracting dollars won’t count towards the 49% that is allowed to be subcontracted on service and supplies small business (and disadvantaged business) set-aside contracts. Let’s look at how subcontractors can use the rules change tactically:

Small Business Subcontractors

Small business acting as subcontractors have typically been in a challenging position to receive much business on a federal contract unless they were an industry leader that also happened to be a small business. Since the prime contractor no longer will be mandated to do 51% of the work share, let’s look at three tactics similarly situated small businesses can use under the new rules:

1. Obtain sizeable shares of work under IDIQ contracts in which they are not the prime contractor on. This situation occurs frequently for small businesses as they don’t generally have the resources to be a prime contractor on every IDIQ they would like to be. Under the new rules, a similarly situated small business could perform up to 99% of the work on a task order; though the prime would still need to manage the overall effort. Here’s a couple scenarios where that could be advantageous:

Scenario 1: A small business’s current contract is being re-competed under an IDIQ they are not a prime contractor on. Under current rules, their maximum work share for that small business would be 49%. However, under the new rules, the small business could team with a similarly situated business and perform up to 99% of the work share. This is a great way to keep the vast majority of business on a re-compete.

Scenario 2: A small business has a great opportunity to win a certain bid (specialize in the service, low pricing, great customer relations, etc.), but it’s not on the IDIQ or the acquisition strategy changed at the last minute. Under the new rules, this small business could team with a similarly situated prime contractor and do up to 99% of the work share. This is a great way for a small business team to take advantage of one partner’s specialization or relationships in a competitive bid.

2. Similarly situated small businesses can now more easily negotiate a sizeable portion of a contract while acting as a subcontractor; in particular where a large business (or businesses) is on the team. Under current rules, the small business subcontractor’s work share has to come out of the 49% work share available for subcontractors; which if a large business is part of the team, tends to be very little. Now the similarly situated small business can negotiate its work share from the prime contractors 51% work share, and depending on the value the company brings (e.g. lower prices, specializations, customer relations, etc.), may negotiate a very sizable share of a contract.

3. A small business that doesn’t want to be a prime contractor, yet wants to be heavily involved on a contract. There are a number of reasons that a small business may not want to prime a contract, and the new rules provide the opportunity for that small business to subcontract to a similarly situated entity, yet still do up to 99% of the work share.

Large Businesses

Large businesses are almost entirely winners from this rules change, as they can carve out 49% of the work share much more easily under the new rules. Under current rules, if the contracting team needed a particular small business teammate for various reasons (business specialization, customer relationship, IP, etc.), that work share had to come out of the 49% work share available to all subcontractors. Now, that small, similarly situated teammate’s work share can come out of the prime contractor’s work share, maintaining the large businesses work share at or near 49%. This is especially important for solicitations that are moving from full and open to a set aside solicitation or when a small business outgrows its NAICS size standard when the re-compete occurs. The incumbent large business wants to maintain as close to half the contract value on the re-compete as possible, and the new rules will make that much easier without degrading either the team or the large business’s work share.

In addition to using subcontracting new tactics on individual opportunities, businesses (small and large) need to look at their organizational strategy to ensure that they are still well positioned for tactically positioning themselves, particularly with cost being such a major factor. Organizations failing to update strategy may find themselves being beat by nimbler, more aggressive competitors who better adapt to the new rules of the game.

Originally published by Zack Sionakides on LinkedIn

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