Awards to JVs (and the 50% rule)

[Statler]

Hello everyone, I was wondering if anyone has thoughts on this scenario:

I know that small businesses can form a Joint Venture to be the prime contractor for small business set-asides, and the JV will still be considered small so long as all of the members are small (and subject to a few other limitations). FAR 9.601; 13 CFR 121.103.

FAR provisions 19.508 and 52.219-14 require small business primes to self-perform at least 50% of the work (or put another way, limits the amount that can be subcontracted to 50%). So in this case, since the JV is the small business prime, the JV has to self-perform at least 50% of the work.

Presumably the JV will act (i.e. self-perform) either through the efforts of its members or through employees hired by the JV through the financial contributions of the members.

The JV can then enter into subcontracts for the rest of the work (up to 50%), including subcontracts with its own members (right?). And I assume that the subcontracts given to members of the JV are subject to the 50% rule since the JV is not performing them.

My question is: at what point does work by a member become a subcontract? Specifically, if a member charges a fee (profit) for the work it performs for the JV, does it then become a subcontractor for purposes of the 50% limitation on subcontracting rule? I think that it must, otherwise there would be fee-on-fee, but interested in other opinions. Thanks in advance.

[here_2_help]

Hi Statler,

The purpose of the limitation on subcontracting is to prevent a small business from acting as a "front" for a large business, right?

So if the JV prime is a small business and all the JV members are small businesses, why are you concerned about specific application of the 50% limitation? In your scenario, it appears to make little difference.

With respect to your question--

My question is: at what point does work by a member become a subcontract? Specifically, if a member charges a fee (profit) for the work it performs for the JV, does it then become a subcontractor for purposes of the 50% limitation on subcontracting rule?

I would ask you how the JV was proposed. What did the JV tell the CO with respect to how it would operate?

Also, if the JV members get a share of the JV's operating profits, I would hope they are entering into cost-plus-no-fee subcontracts.

The operations of a JV in government contracting is something I've been interested in for a while. I'd like to hear how this works out for you.

H2H

[Statler]

H2H, thanks for your reply. The reason the 50% rule matters is that for business reasons we would like to award subcontracts to some of the members of the JV. And we also need to subcontract some to a large business outside of the JV. I think that both of those will count against the limitation on subcontracting.

[here_2_help]

Statler,

I don't know. I'm not a lawyer and this is stretching what I think I know about this stuff. You should ask a lawyer.

That said, the crux of the issue is how the JV will operate with respect to its members. Will the members second employees to the JV -- i.e., will they be rebadged? The JV could be a shell, with no employees and everything subcontracted out, but it doesn't sound like that's your plan. Instead, it sounds like the JV will be populated for core admin functions, with other work being subcontracted out. Again, if you are subcontracting to a small business then I don't see much risk -- but what do I know?

If you are subcontracting to a large business then of course the limitation on subcontracting is in play.

This final point bears repeating -- WHEN YOU PROPOSE A J.V. YOU NEED TO FIGURE OUT THE RUN RULES AHEAD OF TIME AND EXPLAIN THEM TO THE CONTRACTING OFFICER. There's an analysis article on the WIFCON reading page that illustrates why this is critical.

Now go talk to your lawyer.

H2H

[Don Mansfield]

statler - before you start listening to advice of people on here, check the sba website and what it has to say regarding the non-manufacturer rule. Specifically, if you are providing the product of a small business, you could seek that your cognizant contracting officer submit for a waiver of the rule to the sba. There are specific guidelines to it, but that is the process to "get around it."

dcarver,

Why would statler need to seek a waiver of the nonmanufacturer rule if he was providing the product of a small business concern? By providing the product of a small business concern, wouldn't he already be in compliance with the nonmanufacturer rule?

[dcarver]

dcarver,

Why would statler need to seek a waiver of the nonmanufacturer rule if he was providing the product of a small business concern? By providing the product of a small business concern, wouldn't he already be in compliance with the nonmanufacturer rule?

Hmm, nevermind. I re-read his comments and 15 USC § 637(a)(17), I'll take that back. As long as the portion of subcontract he referenced above to the large business is under 50% he should be fine, at least in terms of the non-manufacture rule. I initially read the sba guidance to say that if the company was subbing out 50% no matter what they needed the waiver.

[HCuffage]

FAR provisions 19.508 and 52.219-14 require small business primes to self-perform at least 50% of the work (or put another way, limits the amount that can be subcontracted to 50%). So in this case, since the JV is the small business prime, the JV has to self-perform at least 50% of the work.

Presumably the JV will act (i.e. self-perform) either through the efforts of its members or through employees hired by the JV through the financial contributions of the members.

The JV can then enter into subcontracts for the rest of the work (up to 50%), including subcontracts with its own members (right?). And I assume that the subcontracts given to members of the JV are subject to the 50% rule since the JV is not performing them.

My question is: at what point does work by a member become a subcontract? Specifically, if a member charges a fee (profit) for the work it performs for the JV, does it then become a subcontractor for purposes of the 50% limitation on subcontracting rule? I think that it must, otherwise there would be fee-on-fee, but interested in other opinions. Thanks in advance.

Please take note that the requirement is not 50% of the work, but rather "At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern" if this is for services (non-construction). Even for supplies, the requirement is limited to 50% of the cost of manufacturing the supplies and materials are excluded from that measure. This is an important distinction. Materials/supplies could constitute a significant portion of the contract costs and do not have to be self-performed. So it is not correct to characterize the requirement as either "self-performing 50% of the work" or "limit the amount that can be subcontracted to 50%." Read the 52.219-14 clause closely.

On a note of interest, I saw somewhere a while back that the SBA was considering redfining this limitation to be that no more than 50% of the work could be subcontracted to other than small businesses. I don't remember if this was in a proposed rule stage or not - but have not seen anything come of it in the FAR, so I don't know where it stands. But it would be an interesting deveiopment if it comes to pass because it is easier to audit for compliance based on the value of subcontracts and business size. Another interesting aspect would be that such a rule would mean that the SB awardee can be a broker and sub everything as long as the subcontracts to businesses not small did not exceed 50% of the contract price.

[HCuffage]

I have tracked down the status of the proposed redefinition of the Limitations on Subcontracting. It did nor survive in the original proposed form, but did get changed to what is being talked about -- subcontracting no more than 50% of the contract amount. It was passed in P.L. 112-239 - the 2013 NDAA, section 1651 of the enrolled bill. It amends 15 USC 631et seq by inserting a new Section 46 entitled "Limitations on Subcontracting." It was signed into law on January 3, 2013. So, it has not made its way to FAR yet and that is why the FAR clause at 52.219-14 still expresses the limit as 50% of costs incurred for employees. I am not sure where the FAR process is at, but hopefully the change will make it there soon and then the limitation can properly be characterized as "self-performing 50% of the work" or "limiting the amount that can be subcontracted to 50%."

[Retreadfed]

Because the NDAA amended the Small Business Act, which is administered by the SBA, the FAR Councils will likely have to wait on implementation of this change by SBA before the FAR can be amended.

[HCuffage]

Understood...and hopefully SBA will not take too long...it's a change they wanted. The have been unhappy for a long time with the seeming lack of ability and/or actual attempts to enforce compliance. The finalization of the Proposed Rule SBA put out to implement various sections of the 2010 Small Business Jobs Act is still pending also. In that proposed rule, SBA propsed to change the enforcement to the task order level and require task order COs to include compliance with subcontracting limitations as part of the official task order eval and report it in PPIRS. These changes make sense. There are no actual requirements with clear subcontracting opportunities at the master IDIQ contract level - only at the task order level. This also stops the dilemma of contractors appearing to be out of compliance on their first/first several task orders and promising to make it up on future orders, which are not certain to evolve and/or have sufficient subcontracting opportunities to create compliance across the contract.