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ohnoudidnt14

52.219-3 HUBZone Limitation on Subcontracting Issue

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(Another) Limitation on Subcontracting Issue

Again, a FFP HUBZone construction contract in NW Fla. Based on the latest FAR clause, the HUBZone must self-perform (or subcontract to other HUBZone entities) 50% of the work…even for construction. We bid with a plan to achieve this goal. Now the contract has a change order pending that will drastically reduce the scope of work that we (the prime) were going to self-perform and increases the scope of work to be performed by a key Subcontractor. Incorporating the change, it will be nearly impossible to satisfy the referenced FAR requirement for self-performance.

Given this change, the only options I see are: A ) Try to negotiate out the implicating FAR clause associated with the change (I’m not sure the CO thinks they have the authority to do that), or B ) Bid additional people (cost) to sit on their butts and watch the work being done, until we achieve the goal.

Any other ideas?

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CC, yes. In our case, it is an existing contract. Prime and sub have worked out about a 50/50 split of the work, but a change order is de-scoping some of the prime's work and adding to the sub. With the change, we won't be able to meet the 50% requirement.

This post has had several views already, with no other comments. I would think that the answer would apply to most socioeconomic categories where an applicable limitation on subcontracting might be compromised by a change order that applies heavily to one or more subs.

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How about quoting the version of the clause in your contract for exact wording. I have a comment but want to read it first. It may be later this morning before I can get back here.

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Joel...I always welcome your input. Here is the clause, although I've cut it off for space. See specifically ( d )( 3 ) and ( d )( 4 ).

52.219-3 Notice of HUBZone Set-Aside or Sole Source Award.
As prescribed in 19.1309(a), insert the following clause:
[ b ]Notice of HUBZone Set-Aside or Sole Source Award (NOV 2011)
(a) Definitions. See 13 CFR 125.6(e) for definitions of terms used in paragraph ( c ).
( B ) Applicability. This clause applies only to—
(1) Contracts that have been set aside or reserved for, or awarded on a sole source basis to, HUBZone small business concerns;
(2) Part or parts of a multiple-award contract that have been set aside for HUBZone small business concerns; and
(3) Orders set-aside for HUBZone small business concerns under multiple-award contracts as described in 8.405-5 and 16.505( B )(2)(i)(F).
© General. (1) Offers are solicited only from HUBZone small business concerns. Offers received from concerns that are not HUBZone small business concerns will not be considered.
(2) Any award resulting from this solicitation will be made to a HUBZone small business concern.
(d) Agreement. A HUBZone small business concern agrees that in the performance of the contract, in the case of a contract for—
(1) Services (except construction), at least 50 percent of the cost of personnel for contract performance will be spent for employees of the concern or employees of other HUBZone small business concerns;
(2) Supplies (other than acquisition from a nonmanufacturer of the supplies), at least 50 percent of the cost of manufacturing, excluding the cost of materials, will be performed by the concern or other HUBZone small business concerns;
(3) General construction. (i) At least 15 percent of the cost of contract performance to be incurred for personnel will be spent on the HUBZone prime contractor's employees;
(ii) At least 50 percent of the cost of the contract performance to be incurred for personnel will be spent on the HUBZone prime contractor's employees or on a combination of the HUBZone prime contractor's employees and employees of HUBZone small business concern subcontractors; and
(iii) No more than 50 percent of the cost of contract performance to be incurred for personnel will be subcontracted to concerns that are not HUBZone small business concerns; or
(4) Construction by special trade contractors.
(i) At least 25 percent of the cost of contract performance to be incurred for personnel will be spent on the HUBZone prime contractor's employees;
(ii) At least 50 percent of the cost of the contract performance to be incurred for personnel will be spent on the HUBZone prime contractor's employees or on a combination of the HUBZone prime contractor's employees and employees of HUBZone small business concern subcontractors;
(iii) No more than 50 percent of the cost of contract performance to be incurred for personnel will be subcontracted to concerns that are not HUBZone small business concerns.

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Thanks, ohno. You said that you "bid" the job with a plan to achieve a "goal" of self-performing (or subcontracting to other HUBZone entities) 50% of the work. Correct me if I am wrong but to "bid" generally means that this contract resulted from a competitively bid IFB awarded to you as the low bidder. If this is not correct, please explain if this was a competitively or sole source negotiated contract and please clarify whether this is a task order (ID/IQ) contract or is it a contract for a single project.

In addition, there is no "goal" to self-perform or to subcontract to other HUBZone entities 50% of the work. The clause that you cited contains REQUIREMENTS that apply,m depending upon the nature of the contract. In the case of construction, this contract (or is this a task order under an ID/IQ contract?) is either one for general construction OR one for construction by a special trade contractor. I am going to assume that this is not the latter, since your firm or a combination of your firm and another HUBZone subcontractor firm planned to self-perform certain wotk and a subcontractor is going to perform other work that you apparently are not qualified and/or equipped to self-perform. Therefore, this is a contract or task order for general construction with subcontracted work, which may or may not involve a specialty SUBcontractor(s). Please clarify if I am wrong.

Therefore, paragraph ( d )( 3 ) and ( d )( 4 ) cannot both apply to the same task order or specific contract scope of work. I assume that only ( d ) ( 3 ) applies.

According to 13 CFR § 126.700 these are the performance of work requirements for HUBZone contracts:

"( a ) A prime contractor receiving an award as a qualified HUBZone SBC must meet the performance of work requirements set forth in § 125.6( c ) of this chapter."
"(2) In the case of a contract for general construction, the qualified HUBZone SBC spends at least 15% of the cost of contract performance incurred for personnel on the concern's employees;
NOT APPLICABLE - (3) In the case of a contract for construction by special trade contractors, the qualified HUBZone SBC spends at least 25% of the cost of contract performance incurred for personnel on the concern's employees"
13 CFR § 126.700 continues:
"( b ) In addition to the requirements set forth in § 125.6( c ), one or more qualified HUBZone SBCs must spend at least 50% of the cost of the contract incurred for personnel on its own employees or employees of other qualified HUBZone SBCs.
"(1) A qualified HUBZone SBC prime contractor receiving a HUBZone contract for general construction may meet this requirement itself by expending at least 50% of the cost of the contract incurred for personnel on its employees or it may subcontract at least 35% of the cost of the contract performance incurred for personnel to one or more qualified HUBZone SBCs. A qualified HUBZone SBC prime contractor may not, however, subcontract more than 50% of the cost of the contract incurred for personnel to non-qualified HUBZone SBCs.
NOT APPLICABLE: "(2) A qualified HUBZone SBC prime contractor receiving a HUBZone contract for specialty construction may meet this requirement itself by expending at least 50% of the cost of the contract incurred for personnel on its employees or it may subcontract at least 25% of the cost of the contract performance incurred for personnel to one or more qualified HUBZone SBCs. A qualified HUBZone SBC prime contractor may not, however, subcontract more than 50% of the cost of the contract incurred for personnel to non-qualified HUBZone SBCs."
To be continued...

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I haven't researched specific cases for an answer. However, both parties must understand that the contract price and the method of performance are based upon the scope of work as awarded. We don't know the nature of the added work, except that you said that it "increases the scope of work to be performed by a key Subcontractor." For the sake of this discussion, I assume that you mean that it involves the same type of work as in the original subcontract. The change also "will drastically reduce the scope of work that [you] (the prime) were going to self-perform". I have included the Changes Clause for FFP construction contracts below. I assume that this is the applicable clause that the government intends to use to issue the change.

You said that the option options you see are:: " A ) Try to negotiate out the implicating FAR clause associated with the change ([You're] not sure the CO thinks they have the authority to do that), or B ) Bid additional people (cost) to sit on their butts and watch the work being done, until [you] achieve the goal."

I don't understand what you mean by "bid out" additional people. I am going to assume that you mean that you would have to propose additional labor that will increase your share of the cost of the contract performance to be incurred for personnel to meet the requirements of the contract.

52.243-4 Changes (JUN 2007)

( a ) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes --

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

( b ) Any other written or oral order (which, as used in this paragraph ( b ), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; Provided, that the Contractor gives the Contracting Officer written notice stating --

(1) The date, circumstances, and source of the order; and

(2) That the Contractor regards the order as a change order.

( c ) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

( d ) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph ( b ) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

( e ) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph ( b ) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of the proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph ( b ) of this clause.

( f ) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

(End of Clause)

To be continued...

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This change will apparently:

(1) Change the specifications (including drawings and designs);

(2) Change the method or manner of performance of the work; You said that much of the work that your labor force and/or your labor force and another qualified HUBZONE subcontractor were going to perform will be deleted.

One impact of this change might or might not be that there is such a drastic change in the scope of the original work that it could be considered a "cardinal change". A cardinal change is out of scope, not in-scope, thus not within the authority of the KO to unilaterally direct. Such "changes" require bi-lateral agreement to implement. This depends upon the overall situation, of which we don't know all the facts. You would definitely need professional help in determining this. In "Administration of Government Contracts", 4th Edition , by Nash, Cibinic and Nagle, there is some discussion and case law cited, depending upon the specific circumstances, if and how a "change" is within the scope of the contract. Various court decisions have defined cardinal changes differently depending upon the situation. For instance, there have been cases where the government makes alterations so drastic that the contractor was required to perform duties materially different from those originaly called for." (see page 383 of "Administration of Government Contracts" for legal citations). Nash and Cibinic also cite on pages 382-383 a 1922 Court of Claims decision that "work performed falls within the general scope if it "should be regarded as having been fairly and reasonably within the contemplation of the parties when the contract was entered into."

I assume that you did not anticipate the nature of the work being altered to the extent that you can no longer perform the necessary minimum amount of self-performed work or self-employed share of the labor cost, without simply featherbeading the labor force to the extent that there is WASTEFUL SPENDING . Establishing the position that this is a cardinal change, requiring bilateral agreement (to modify the self-performed requirement) may be the path to pursue if the government will not relax the requirement.

Please be aware that paragraph ( c ) of § 126.700 states (before award):

"( c ) A contracting officer may waive the 50% requirement set forth in paragraph ( c ) of this section for a particular procurement after determining that at least two qualified HUBZone SBCs cannot meet the requirement. Where a waiver is granted, the qualified HUBZone SBC prime contractor must still meet the performance of work requirements set forth in § 125.6( c ) of this chapter."

This might proviode the government some leeway in modifying the requirement. I don't don't know if you would still be able to meet the 15% requirement under § 125.6( c ) with the change as proposed.

Even if the change is within the scope of the Changes clause, the clear impact is that, unless you totally change the planned execution of the contract, you can't meet the self-performance requirements, due to the government's actions, not yours. Thus the UNCHANGED work is impacted, per the Changes clause.

I think that you probably need to consult with a good lawyer but I would first discuss what options the government might have to alleviate this problem.

To be continued... (Got a meeting at church tonight.)

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A couple of thoughts that will probably be lost between the continuing posts by Joel but offered up anyway....

First to the comment early on that "I would think that the answer would apply to most socioeconomic categories". I do not think so in that HUBZone is covered in its own separate CFR and FAR subpart so what applies to HUBZone applies to HUBZone, just like 8(a) to 8(a), SDVOSB to SDVOSB, etc. In some cases it might, see FAR 19.3, in others not.

To the suggestion of getting a lawyer I suggest that you contact SBA as well and maybe first. The question you have posed could go the issue of eligibility of HUBZone status. I understand SBA may be difficult to communicate with but in my view getting the answer direct from them, in writing, is the best fail safe. Any answer here as you can probably already tell is just best effort to be helpful.

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If the government decides that it can't waive the 50% requirement and the prime can't comply due to the impact of the government's change of requirements, not the fault of the contractor, then the government may have to terminate the contract for convenience. But we don't know all the facts of the situation. The government should NOT agree to featherbed the job to meet a requirement that it caused to be unachievable.

I think I like Carl's suggestion.

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The clause at FAR 52.219-3 makes no provision for contract modifications and is very clear about the prime's obligations.

In that regard, I note that the original poster said:

Prime and sub have worked out about a 50/50 split of the work, but a change order is de-scoping some of the prime's work and adding to the sub. With the change, we won't be able to meet the 50% requirement.

That quote seems to say that the change makes it impossible for the prime and the sub to maintain the deal that the two of them made between themselves. That is too bad, but that is not what matters. What matters is whether the change makes it impossible (impossible) for the prime to comply with the clause, regardless of what happens to the deal it made with the sub. The prime might have to terminate the sub in whole or in part and do more of the work itself. Why can't it do that? It doesn't matter if the sub will sue the prime. The prime will just have to deal with that possibility.

If the change does make it impossible for the prime to comply with the clause, not just with the deal it made with the sub, then it should make that clear to the CO right away, with proof, and demand relief as part of an equitable adjustment.

​As for Carl's suggestion, I don't believe that SBA has any role in enforcing paragraph (d) of FAR 52.219-3. The prime had better direct its inquiry to the CO. I suppose that the prime can seek the SBA's opinion about how those requirements should be interpreted, but I think the CO has to make the decision.

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I know splitting hairs with Vern can lead to some extended further posts but I will offer this. I agree the CO could address performance of work but a CO will not give any thought to whether their action could cause risk or harm to eligibility of the HUBzone firm, been there by experience. Has a CO ever awarded a HUBZone set aside to a non-HUBZone entity?

Eligibility is of primary concern to SBA (Oh..., your posts on other topics support this in my view). I would hope no matter the approach that somebody includes SBA in the conversation as to not do so seems risky business to me.

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I don't disagree with what Carl just said about talking to SBA. But it's up to the CO to enforce the clause, not SBA. I searched and could not find a single instance of SBA seeking to enforce paragraph (d) of the clause or passing judgment on it. In fact, I couldn't find an instance of anybody seeking to enforce it after contract award.

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Vern, I tend to agree with your last post. From my past experience in an oversight role over ACO offices, this clause often tends to be ignored by the government after award. The contract administration teams and ACO/ PCO's that just get the job done with as few visible issues get the accolades and performance awards. Those offices that towed the line but ended up with performance issues because of that we're not rewarded for their due diligence.

As you and I mentioned, an impact of this change on the unchanged work would result from having to change the plan of how it is to be constructed (by whom). However, it may not be as simple as the prime taking over some of the work currently subcontracted to the non HUBZone sub. It is likely that the prime isn't qualified, staffed or equipped to perform that type of work, although we don't know that here from the information provided. That isn't necessarily a negative reflection on this prime any more than on most general contractors.

Another option that you mentioned was to replace the non-HUBZone sub with a qualified HUBZone sub. That might or might not be possible or commercially practicable. At any rate, I have never seen where replacing one sub with another didn't result in higher costs or delays. Then there is the matter of adding significantly more of the same type of work presently being subbed out. Then add in the Added costs of terminating the current sub and we (government and the prime) have a real mess on our hands . Just stating that the prime must comply after award if the government changes the character of the entire work plan and magnitude of the makeup of the work doesn't necessarily make it enforceable if it isn't commercially practicable or even possible to comply. That is why I mentioned the possibility that creating such impacts might cause the change to be a cardinal change to the contract. At any rate, the government would be liable for the cost and time impacts that it may cause or create.

It may well be in the governments best interest to work with the contractor to minimize the impacts of strict compliance with the clause in such an instance where the governments actions create such drastic impacts.

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I'm not interested in what might or might not be possible for oh-whoever before I know the facts. I leave that to you. I don't see any point in writing multiple wordy and ultimately pointless and unhelpful posts stuffed with lengthy quotes before I understand the situation.

What prompted me to write was that when I read oh…'s posts I found that he was not clear about the situation -- Was the change in-scope or out-of-scope? Did the change make compliance with the clause impossible or just inconvenient or more costly? I see no point in writing endless blah-blah-blah speculations "to be continued".

I'm also not interested in what may or may not be in the government's best interests regarding a situation I don't know anything about. I leave that to you, as well.

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ohno, its your turn to provide a clear picture here.

As for looking out for what is in the best interest of the taxpayers of the United States, that has always been MY interest as it should be for every contracting official at any point in a situation. In addition, I have also been trained to act in good faith and to deal fairly with contractors. My GS-15 area engineer on a huge program explained those two standards to me on the first day that I went to work for the USACE in 1980 in a welcoming interview. I try to never forget them.

When there is still time to discuss options before either party does something stupid, strive for a Win-Win or No Deal solution. The parties should discuss the options and possible consequences as early as possible to avoid wasting everyone's resources, time and money. Throwing money at a situation isnt the first answer. The key is for both parties to try to successfully complete the construction contract without needlessly creating impacts and avoid to waste and to minimize disruption for both sides. Avoid or minimize increased costs, expenditure of resources and time if at all possible.

In order to do that, I analyze the situation, try to understand it, identify missing information and ask for it. It has been a successful approach.

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Noting Vern's comment directed at my view on contacting SBA consideration might be given to this fact.

FAR 52.219-3 is only in the FAR as a result of SBA developing the performance criteria and first placing in what I will call "their" regulations at 13 CFR 126.700 and 13 CFR 125.6. Sure a CO is the only authorty to administer the contract and can do anything he/she may want in administering the clause but as a SBA derived requirement in makes all the sense in world to ask SBA for assistance in interpreting whether the limitations apply once performance of a contract begins.

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Joel:

It might be in the best interests of the taxpayers to ensure that they get from the contractor what is due to them. In the case of a contract awarded pursuant to a HUBZone set-aside, part of what is due to them is that a certain percentage of the employment benefits of that set-aside go to workers located in a HUBZone, which is why there is a HUBZone Program, why 15 U.S.C. 657s limits subcontracting in contracts awarded under HUBZone set-asides, why 13 CFR 126.700( c) allows COs to waive the SBA-established limit on subcontracting under HUBZone set-asides only under certain pre-award conditions, and why COs must put FAR 52.219-3 in HUBZone solicitations and contracts and strictly enforce it.

Contractors receiving contracts under HUBZone set-asides promise to adhere to those limits, and the clause does not provide for a waiver of the limits when a contract is modified. COs have no express authority to waive the limits as an ordinary part of an equitable adjustment in order to preserve a deal made between a HUBZone contractor and one of its subcontractors. A prime contractor should not make a deal with a subcontractor that makes it potentially impossible for the prime to fulfill its own obligations. If it does make such a deal, a CO should not rescue the prime at the expense of the very people for whom the HUBZone program was established. Contractors should know that any unauthorized waiver of the limits might not be enforceable and could lead to serious trouble.

Wifconers should make sure that they understand an issue before pontificating about it, especially if you're going to pontificate ad nauseum and in installments.

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Noting Carl's last comment: An SBA interpretation of its regulations is not the be all and end all. While the courts wil defer to a reasonable SBA interpretation of its regulation, they do not always agree with such interpretations. The SBA regulations allow COs to waive only a part of the limitations and then only in light of pre-award conditions, not in response to contract modifications. The SBA regulations setting HUBZone subcontracting limits do not even mention the possibility of waiving the limitations in response to a contract modification, and SBA cannot change the requirement to comply with the limitations without first engaging in APA rule-making.

I've already said that the parties can check with SBA. But a CO who checks and a contractor who makes a deal with that CO had better understand the limits of the CO's authority, and SBA's.

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Wow...I think I've stirred up something here, so I will clarify a few things.

1) Yes, IFB, low bid

2) Since there is one prime (HUB) and only one sub (non-hub), the requirement is 50% (BTW, calculated in accordance with Vern's option 2, post #25, "Is this professor right?"). So, I didn't think it was relevant if it fell under ( d )( 3 ) (correct assumption Joel) or ( d )( 4 ) since subparagraphs ii) and iii) are the same for both.

3) Confirm that 50% is a "requirement", not a "goal".

4) The pending change CAN be considered a change "within the scope" of the original contract.

5) The change is actually laying out some methods-and-means by which we (the contractor) must accomplish most of the work. Whereas this is not ordinary for the government, we are trying to work in good-faith with them as this is a critical 24/7 occupied medical facility with work scheduling/phasing requirements that were not identified in the original bid documents.

6) Vern, the subcontractor is a specialty subcontractor for which the prime does not have the experience, qualifications, equipment, licenses, or insurance to accomplish. Technically, you are correct that it would not be impossible for the prime to perform more of the subcontractors work...just impractical. It would probably cost less for the prime to "featherbed", as Joel called it, which none of us would like to do (hmmm, would it be wasteful spending if it actually cost less?). Anyway, I don't think it would be in the best interest of the government for the prime to perform this specialty work for many reasons. In retrospect, this contract was probably not a good candidate for a HUBZone set-aside in the first place, but that's water under the bridge.

7) This contracting officer is tracking compliance with the FAR requirement...and even if she wasn't, I always intended to comply with the requirement and would not want to risk the possible result of non-compliance, after the fact.

So I guess my question has evolved to this...Does the Contracting Officer have the authority to remove the FAR clause 52.219-3 from the contract associated with a negotiated change and defer to the requirements of § 125.6( c ) ?

Joel points out (posting #10) that the Contracting Officer does have this authority under § 126.700 ( c ) "...after determining that at least two qualified HUBZone SBCs cannot meet the requirement." But: 1) this is clearly intended for such a determination prior to award of the contract, and 2) the condition "two qualified HUBZone SBC's cannot meet the requirement" is not necessarily an issue.

Carl/Joel/Vern...is this enough information?

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Follow-up, I started writing that last post after #17...by the time I finished/posted it, y'all were up to #21.

It seems as if Vern is cautioning that even if the Contracting Officer thinks they have the authority to take out the clause, that authority may not hold-up if challenged. Per the previous postings, it is apparently the Contracting Officer that is charged with enforcement of the clause in the first place (and not the SBA). Therefore, if the CO agrees not to enforce it (or, more correctly, to enforce § 125.6( c ) as an alternate), is there really an issue, who would be left to challenge the performance?

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So the government has issued a within scope change order requiring the contractor to perform in a certain way. The change will make it difficult for the prime to comply with the limitations on subcontracting, but not impossible. The question is whether the CO can delete the clause or waive or change the limitations on subcontracting as part of an equitable adjustment under the Changes clause.

I think the answer is no. The limitations are grounded in statute. The limitations and implementing contract clause are required by regulations (13 CFR and 48 CFR) having the force and effect of law. (See "The Christian Doctrine at 50: Unraveling the Federal Procurement System's Gordian Knot," 13-11 BRPapers 1 (Oct. 2013) at 16 and Endnote 170.) I know of no statute or regulation that expressly or impliedly authorizes a CO to delete, waive, alter, or agree not to enforce the limitations on subcontracting in reaction to a contract modification. The Changes clause, FAR 52.243-4, requires the CO to equitably adjust only the contract price and delivery schedule if a change order affects them. I have searched everywhere I know for any decision regarding, or discussion of, the impact of contract modifications on enforcement of the limitations on subcontracting.

You wanted options. Okay, explain your problem to the CO and discuss possible alternatives to the proposed change. If there are no alternatives, then estimate the impact of the change on cost and schedule and notify the CO of them at the earliest practicable time in accordance with the terms of the Changes clause.

An express or implied agreement to the effect that the CO will not enforce the clause is not a legal option. In my opinion, failing to comply would be a serious mistake.

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Ohno, going back to one of Carl's posts, have you considered the possible effect the ostensible subcontractor rule may have on you and your size status in this situation?

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