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SLK Contractor

SBA Final Rule regarding limitations on subcontracting requirements - section about Affiliates

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Question regarding recent SBA Final Rule

 

A section from a publication summarizing a recent SBA Final Ruling has concerned management in my company:

 

PUBLICATION segment:

“From Kostos & Lamer, P.C.

Government Contracts Update

June 2016

SBA issues Final Rule reinterpreting limitations on subcontracting requirements…

…Another aspect of the Final Rule involves interpreting when two companies are affiliated for size purposes.   There is now established a rebuttable presumption that if, over a three year period, one firm derives over 70% of its revenues from another firm, the two firms are presumed to be affiliated.  The burden in such cases would be on the challenged firm to rebut the presumption.”

 

QUESTION:

Here is our concern:

According to FAR 16.601 the hourly rates for services transferred between affiliates (A) shall include no profit, (B) May include profit for the prime contractor.

Below is an example to show how we are interpreting this as it applies to us (we are “Company A”):

COMPANY A Revenue (all numbers are revenue from subcontracts)

 

Year 1

Year 2

Year 3

Total

%

Subk#1

6.00

7.00

9.00

22.00

71.0%

Subk#2

2.00

2.00

2.00

6.00

19.4%

Subk#3

1.00

1.00

1.00

3.00

9.7%

     

Total =

31.00

 

 

Given this example, would Company A be considered an “affiliate” of Subk#1?  And as such, Company A would NOT be allowed to put profit on its rates and would have to perform the Subk#1 work “at cost”?

Are we interpreting this ruling correctly?

 

 

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I'm not sure that I understand your concerns, but if they have to do with the use of the word "affiliates" in FAR 16.601, the definition and standards for "affiliated" in the Small Business Administration's regulations has no bearing. The definition of affiliates in FAR 16.601 is found in FAR 2.101:

 

Quote

“Affiliates” means associated business concerns or individuals if, directly or indirectly—

(1) Either one controls or can control the other; or

(2) A third party controls or can control both.

 

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13 CFR Section 121.103 (f) --

(1) Firms owned or controlled by married couples, parties to a civil union, parents, children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.

(2) SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.

(i) This presumption may be rebutted by a showing that despite the contractual relations with another concern, the concern at issue is not solely dependent on that other concern, such as where the concern has been in business for a short amount of time and has only been able to secure a limited number of contracts.

(ii) A business concern owned and controlled by an Indian Tribe, ANC, NHO, CDC, or by a wholly-owned entity of an Indian Tribe, ANC, NHO, or CDC, is not considered to be affiliated with another concern owned by that entity based solely on the contractual relations between the two concerns.

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Vern,

Why quote the SBA regulations? Because I find it helpful to review the actual language of the regulations, rather than to rely on somebody's summary of what they think the regulations say. The OP stated "A section from a publication summarizing a recent SBA Final Ruling has concerned management in my company" and I wanted to make sure the person had the actual regulatory language to address those concerns. The stuff from FAR 16.601 was just red herring, to my way of thinking.

H2H

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In addition to what Vern wrote, it is good to note that the FAR refers to entities under common control.  Thus, it is not enough that entities are affiliated with each other.  They must also meet the common control test of the FAR.  As interpreted by the ASBCA, this test requires actual control instead of the ability to control which is a part of the test for finding affiliation under the FAR.  See, Talley Defense Systems, Inc., 93-1 BCA 25,521.  While Talley dealt with how common control is used in the cost principles, the same reasoning likely would be applied if FAR 16.601 were to be an issue in a dispute.

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2 hours ago, here_2_help said:

Vern,

Why quote the SBA regulations? Because I find it helpful to review the actual language of the regulations, rather than to rely on somebody's summary of what they think the regulations say. The OP stated "A section from a publication summarizing a recent SBA Final Ruling has concerned management in my company" and I wanted to make sure the person had the actual regulatory language to address those concerns. The stuff from FAR 16.601 was just red herring, to my way of thinking.

H2H

H2H:

The SBA regulations about "affiliation" have nothing to do with the FAR definition of "affiliates" as used in FAR 16.601, which is what the company is concerned about. SLK Contractor wrongly assumed that the meaning of "affiliates," as used in FAR 16.601, is affected by the SBA regulations for "affiliation." It's not. The SBA rule has no bearing on the affiliate profit exclusion policy applied to T&M contracts.

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