February 21, 2015 Zack Sionakides no responses

Tactics When Subcontracting to Similarly Situated Entities – Part I

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.

The rules are currently being developed by the Small Business Administration (there are currently proposed rules out for comment), and will have significant effects on both small and large business strategies and tactics when it comes to teaming in the future. Part I talks about how small business prime contractors can use the rule changes tactically. In part II, we’ll look at tactics that subcontractors, both large and small, can use to take advantage of the new rules regarding subcontracting to similarly situated entities.

Small Business Prime Contractors

Small businesses (and disadvantaged small businesses) will gain a lot of flexibility in how they can approach solicitations as a prime using the similarly situated entities rule. The prime will no longer be entirely mandated to do 51% of the work share, which can significantly expand opportunities in the following ways:

  1. If the small business is a prime on an IDIQ, it can team with other similarly situated entities (presumably that are not primes on the IDIQ) to go after task orders that it otherwise would not be well positioned to win. This is ideal on task order responses where the prime may be strong on a piece of the work (e.g. 30%), but needs a teaming partner(s) to better position the offer or reduce the proposed price.
  2. The team can better match work share to the team member’s strengths. Let’s look at a simple hypothetical team that has three team members (2 small, 1 large) who are each specialized to do 33% of the work on a set-aside contract. Under current rules, one of the small business would be the prime and have to do 51%; meaning that 18% of the effort would be proposed in a non-ideal manner. With the new rules, the team can split the work to match their specialized skill sets, providing a more ideal solution and/or lower price for all parties.
  3. Negotiating of teaming agreements should be simpler; in most cases. Let’s say you’re a small business prime who wants to put together a team consisting of yourself, a large established business, and a couple small specialty companies (who are similarly situated entities). Under the current rules, the prime has to negotiate work share with the large business and the small businesses serially or in parallel, in what is essentially a zero sum game. Everything you give to the large business has to come from the small businesses and vice versa, often making for tense, high stakes negotiations, particularly if one or more of the team members are key to the proposal. With the new rules, the small businesses work share can come out of the prime’s work share, making a win-win in theory. The potential downside to this for prime contractors is that the key team members can negotiate must larger work shares than before, even to the point that the prime is squeezed out of significant work share they may have wanted to keep in-house.
  4. Small businesses will have greater options when it comes to labor pooling to reduce costs and/or comply with various labor regulations (e.g. Service Contract Act (SCA), Davis-Bacon Act (DBA), etc.). Small business primes can take advantage of the new rules to better position themselves for winning particularly where price plays a major factor. Let’s look at a couple examples of how this tactic can be used:

Example 1: A professional services firm that focuses on higher end services wants to pursue an opportunity, however 60% of the work is SCA positions, which the firm is not situated to handle without a significant investment. Under the new rules, the firm could subcontract with another similarly situated firm that specializes in SCA compliance and still prime the opportunity while keeping their price down. Under current rules, the firm would be limited to becoming SCA compliant, being a subcontractor to another contractor, or no-bidding the opportunity; all less than ideal options.

Example 2: A professional services firm that focuses on mid to higher end services and maintains a generous benefits package to attract professionals, wants to pursue an opportunity that has more than 50% lower end positions and/or cost is a major factor in the bid evaluation (this could also be a re-compete where cost has significantly increased in importance). The firm can utilize a similarly situated entity that has lower costs and less generous benefits to staff the lower to middle positions, while keeping the higher end and key positions in-house. This lowers the overall bid price while presenting the greater capability of the prime, increasing the probability of win.

In addition to using new tactics on individual opportunities, small businesses need to look at their organizational strategy to ensure that they are still well positioned for winning in the new federal marketplace, 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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