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Limitations on Subcontracting compliance

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On a small business set-aside for services, the Limitation on Subcontracting clause (13 CFR 125.6) requires that the prime contractor "perform at least 50 percent of the cost of the contract incurred for personnel with its own employees."

The term, Cost of contract performance incurred for personnel," is defined as, "Direct labor costs and any overhead which has only direct labor as its base, plus the concern's General and Administrative rate multiplied by the labor cost."

Question 1: How should this clause be applied to a Firm-Fixed Price contract, where prime contractor's cost data is not requested by or provided to the Government. And further, the subcontractor is performing on either a Firm-Fixed Price or T&M/Labor Hour basis, where the prime contractor does not have any visibility into the subcontractor's cost data since they are providing fully-burdened labor rates to the prime contractor.

Should "cost" in this instance be read as "price"? And if so, is it price paid by the Government? In other words, If the labor price of the prime contract is $5 million, and the subcontractor performs labor for which the government pays $2.5 million to the prime contractor, is the requirement satisfied? I have yet to find any reference in the FAR or otherwise where this is clearly articulated. Any assistance would be appreciated.

Question 2: For certain professionals such as Physicians, it is very common for such individuals to work as independent contractors ("1099s") rather than as W2 employees of the prime contractor. The Limitation on Subcontracting clause requires the prime to perform 50 percent of the labor "with its own employees." I have read conflicting authorities and opinions on whether such independent contractors should be treated as employees or subcontractors, for purposes of compliance with this requirement. As a practical matter, where a prime contractor is responsible for providing a service contract mostly consisting of Physicians to the Government, it can be nearly impossible for a small business to staff such a requirement "with their own employees" if interpreted literally. SBA has declined to provide clear guidance on this matter, leaving it up to contractors to figure out. If others have encountered this dilemma, I would be very interesting to know how it is addressed.

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I believe that the Clause is included because the prescription (and some law) requires it, not because the CO thinks it should be included for this specific requirement.

If you ask the CO directly, verbally, you might get a better answer.

This sort of thing, violating 52.219-14, sometimes results in criminal charges, but only after someone knowledgeable complains.

If all contractors submitting bids are made aware of the ground rules, you might skate free.

If that's not good enuf, that's all I got. Sorry.

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Thank you, Brian. As you noted, the clause is generally a matter of contract administration - enforced by the KO, so if you follow their guidance, you're generally on reasonably solid ground. I'm just wondering if there is any outside regulatory authority that clarifies this - my understanding is there is not.

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