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SKoslow

Limitations on Sub-Contracting

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Good afternoon everyone. 52.219-14 states:

(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for -

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a non manufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Second scenario: If the Prime uses the HR/recruiting company and pays a recruiting fee, and they are the employee of the prime is there any restriction? Is there any restrictions to these scenarios? Thank you

 

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Who pays the employees?

Does the prime pay the employees directly or does the prime pay the HR/recruiting company, which then pays the employees?

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Thanks Vern for your quick response.

1st scenario: HR firm is a sub and pays the employees for the first 6-12 months. After 6-12 months the prime hires/picks up the employee on the primes books. This avoids paying a large recruitment fee of 5-10%.

2nd scenario: Prime pays employee on day 1, and would pay the recruiting firm the recruiting charge of 5-10%.

Scenario (1) Firm is listed as a sub.

Scenario (2) they are only listed in the recruitment/retention/staffing plan.

Thanks

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Okay, this was the question:

3 hours ago, SKoslow said:

If the Prime uses the HR/recruiting company and pays a recruiting fee, and they are the employee of the prime is there any restriction? Is there any restrictions to these scenarios?

If the employees recruited by the HR firm are employees of the prime, meaning that the prime pays the employees, not the HR firm, then those employees count toward the prime's 50 percent. There is no limitation issue. The fee paid to the recruiting firm is not pertinent.

Does that answer your question?

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Vern, again thank you for your response. There seems to be more attention and conversation with regards to the Ostensible Contractor rule. I have been at this for a while, and I don't remember these conversations ever coming up.

So here is the question relating to the above. There has been recent protests where the protest has been upheld showing the contractor relied to heavily on a sub. Where is the line I wonder? If as part of the proposal you identify a sub or subs performing key work or staffing that is less than 50% of the work but is still a critical piece of work and proposal, how should the contractor manage this risk in teaming, staffing, and work share. 

Second part: The Prime must provide 50% of labor dollars not including material. I was always taught that this is over the life of the contract or task order.

Is legal to propose a phased staffing plan this is an extreme example but here you go:

Base plus 4 years services contract.

Base                   Option 1            Option 2           Option 3        Option 4

Prime Sub          Prime  Sub         Prime Sub       Prime Sub     Prime Sub

30%   70%         40%    60%         50%   50%      60%   40%     70%   30%

Thanks Scott 

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1 hour ago, SKoslow said:

So here is the question relating to the above. There has been recent protests where the protest has been upheld showing the contractor relied to heavily on a sub. Where is the line I wonder? If as part of the proposal you identify a sub or subs performing key work or staffing that is less than 50% of the work but is still a critical piece of work and proposal, how should the contractor manage this risk in teaming, staffing, and work share. 

Those questions are vague. Please refine them.

1 hour ago, SKoslow said:

Is legal to propose a phased staffing plan this is an extreme example but here you go:

Base plus 4 years services contract.

Base                   Option 1            Option 2           Option 3        Option 4

Prime Sub          Prime  Sub         Prime Sub       Prime Sub     Prime Sub

30%   70%         40%    60%         50%   50%      60%   40%     70%   30%

No. See 13 CFR 125.6(e):

Quote

Determining compliance with applicable limitation on subcontracting. The period of time used to determine compliance for a total or partial set-aside contract will be the base term and then each subsequent option period.

Check 13 CFR 125.6 for answers to any other questions you may have about limitations on subcontracting.

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One thing that might impact this scenario is 13 CFR §125.6(1) where similarly situated entities (small businesses) can assume part of the 50% requirement.  If the HR firm is a small business under the appropriate NAICS code, their employees are added to the prime employees towards the 50% requirement.  The Ostensible Subcontractor rule does not apply to all of the employees, it only applies to managers, key personnel and contract executives responsible for primary and vital requirements of the contract.

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DWGerard, you have raised an issue that bedevils government contracting.  Not all regulations affecting contracting are found in the FAR.  There are other agencies, notably DoL and the SBA, that have the responsibility for issuing regulations that affect contracting with the FAR Councils then sometimes implementing those regulations in the FAR.  Here, SBA has promulgated regulations implementing a statute for which it has primary jurisdiction.  However, the FAR Councils have not yet implemented those SBA regulations in the FAR.  This raises the question as to what a contracting officer is to do in this situation.  Should the CO follow the SBA regulations which are consistent with current law, follow the FAR which is not consistent with current law and SBA regulations, seek a deviation from the FAR to follow the SBA regulations and statute or do something else.

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The FAR provides little information and no guidance about interpretation and enforcement of the limitations on subcontracting and, except with respect to HUBZones, makes no references to information in Title 13 of the CFR. See Limitations on Subcontracting: Are They Being Enforced? Will They Ever Be?, The Nash & Cibinic Report (August 2014):

Quote

We could not find any extensive current guidance for COs about how to administer compliance with the existing limitations on subcontracting. There is nothing in the SBA regulations and nothing that we could find in the FAR and in the agency supplements. An internet search turned up nothing in the form of policy letters or memoranda. So no one should be surprised if the limitations are not being enforced. If the new limitations are to be enforced, then the SBA and the FAR councils must give contract administration guidance to COs.

 

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There is a requirement in the proposed rule for FAR Case 2014-002, Set-Asides under Multiple-Award Contracts, that would require the contracting officer to document the prime's compliance with limitations on subcontracting. I submitted the following comment:

Quote

Items 49, 58, 63, 67, 71, and 73 would add requirements at FAR 19.505(d), 19.809-2(e), 19.1308(f), 19.1407, 19.1507(d), and 42.1503 for the contracting officer to document the contractor's compliance with the limitation on subcontracting as part of their performance evaluation. However, none of the clauses imposing the limitation on subcontracting contain a corresponding record keeping or reporting requirement pertaining to the contractor's subcontracting activity. In effect, you are requiring contracting officers to do something, but not giving them the tools to do it. What will most likely happen, and what is happening to some extent now, is that contracting officers will begin imposing their own unique record keeping and reporting requirements through the use of local clauses. This is precisely the kind of uncoordinated collection of information that the Paperwork Reduction Act was designed to prevent. Please clarify how contracting officers are supposed to obtain the information necessary to comply with the proposed requirements of documenting the contractor's compliance with the limitation on subcontracting clause. If this information is to be obtained from the contractor, please provide the corresponding OMB control number so contracting officers will be compliant with the Paperwork Reduction Act.

 

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1 hour ago, Don Mansfield said:

What will most likely happen, and what is happening to some extent now, is that contracting officers will begin imposing their own unique record keeping and reporting requirements through the use of local clauses.

That is sort of what is happening in my office. We starting having contractors submit a list of self-performed tasks with expected dollar values, and subcontracted tasks that exceed 5% of the contract value. While this tells us how the contractor intends on complying with subcontract limitations, I think it is very rarely monitored.

I do not know if it is entirely unique, more of an alteration of 44.201-1.

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20 hours ago, Vern Edwards said:

The FAR provides little information and no guidance about interpretation and enforcement of the limitations on subcontracting and, except with respect to HUBZones, makes no references to information in Title 13 of the CFR. See Limitations on Subcontracting: Are They Being Enforced? Will They Ever Be?, The Nash & Cibinic Report (August 2014):

 

 

20 hours ago, Vern Edwards said:

If the new limitations are to be enforced, then the SBA and the FAR councils must give contract administration guidance to COs.

I agree.  Back in the 1990's, I worked with the Atlanta Regional SBA Office to develop an interpretation of 52.219-14, Limitations on Subcontracting, that I put into a form for proposers to quantify what and how they planned to comply with the clause.  We also developed a form for unrestricted construction contracting using the 52.236-1, Performance of Work by the Contractor. 

We used them during construction source selections and for negotiating sole source construction contracts.

However, once awarded, the ACO offices pretty much ignored enforcing the clauses.  They already had full plates, there was no guidance other than mine (which, for the 52.219-14 clause, I had coordinated with the SBA).  Plus, the Resident and Area Engineers' performance ratings reflected how few problems rose to the District Office level.  No incentive to rock the boat or draw attention to their offices. 

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I have been advising KOs to refer any suspected violations of the Limitations on Subcontracting to the SBA Area Office for their action.  If its a CFR issue, then its up to the SBA to resolve the problem.  The LOS scenario is similar to the Ostensible Subcontractor evaluation and the SBA is authorized to obtain employment records and financial documents so it can perform the analysis with all the needed data, and the SBA office is set up for that work so it is not contrary to the other functions like a contracting office would face.

I can say that because I work for the SBA now as a PCR (Procurement Center Representative), and I am one of the people who would receive those cases to work.

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DWGerard:

But the limitations are imposed by clauses in government contracts, and neither the statute nor 13 CFR give SBA any enforcement authority or powers. Am I wrong? Isn't it a CO's job to enforce the contract terms?

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Wait a minute I believe that both the CO and SBA have "enforcement authority and powers".

“13 CFR 125.6(e)(2)  Compliance will be considered an element of responsibility and not a component of size eligibility.”

FAR 9.104-3 read in full a small business that cannot “comply” with clause 52.219-14 maybe considered non-responsible.

If a CO has reason to determine a small business non-responsible prior to or post award the CO would enlist the process of FAR 19.6 Certificate of Competency.

Further  13 CFR 125.6(h) which states –

“(h)Penalties. Whoever violates the requirements set forth in paragraph (a) of this section shall be subject to the penalties prescribed in 15 U.S.C. 645(d), except that the fine shall be treated as the greater of $500,000 or the dollar amount spent, in excess of permitted levels, by the entity on subcontractors. A party's failure to comply with the spirit and intent of a subcontract with a similarly situated entity may be considered a basis for debarment on the grounds, including but not limited to, that the parties have violated the terms of a Government contract or subcontract pursuant to FAR 9.406-2(b)(1)(i) (48 CFR 9.406-2(b)(1)(i)).”

So if a small business is not complying with FAR 52.219-14 why wouldn’t a CO consider them not responsible to complete the contract, go to SBA for the Certificate, and if none is provided default terminate the small business and request further action by the SBA under the penalties paragraph of 13 CFR 125.6?

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Carl:

Why would a CO make a responsibility determination "post award"? I never heard of a CO determining a contractor "nonresponsible to complete the contract." Are you saying that a CO could declare a contractor in default on grounds of nonresponsibility? What breach of contract would that be?

If the CO knew that the contractor was in noncompliance, why not simply declare them in default on that basis?

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So here's another wrinkle,

the clause states 50% of the labor is to be performed by the prime. Is this a goal or requirement? So what is the CO supposed to do if the 50% drops to 49%, 40% or even 25% where is the line? If its a Deliver order contract and the work that was planned according to teaming agreements changes during execution, and the work is weighted away from the primes capabilities, is this the fault of the prime? While this is an extreme example the situation applies.

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40 minutes ago, SKoslow said:

the clause states 50% of the labor is to be performed by the prime. Is this a goal or requirement?

Here's the pertinent language from the current version of the clause dated JAN 2017:

Quote

(c) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for—

(1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

(2) Supplies (other than procurement from a nonmanufacturer of such supplies). The concern shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of materials.

(3) General construction. The concern will perform at least 15 percent of the cost of the contract, not including the cost of materials, with its own employees.

(4) Construction by special trade contractors. The concern will perform at least 25 percent of the cost of the contract, not including the cost of materials, with its own employees.

Note the shalls and wills. Where the clause says "shall," its stating a requirement. Anything less is a breach, but the breach might not be material if the shortfall is very small. Where the clause says "will" it's expressing intention--a goal.

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Some prime’s treat contract labor and subcontract labor differently. Often, contract labor gets classified as direct labor and subcontract labor gets classified as ODC. So is direct labor equivalent to employee labor for purposes of complying with the LOS? I am not sure. Another aspect to consider is that virtually every person getting work through a contract labor firm has signed an agreement with that firm that makes that individual an independent contractor as opposed to an actual employee of the contractor labor firm. As such, virtually all contract labor is small business labor, although at the 2nd tier not the 1st tier if contract labor is considered as subcontract labor. The intent of the LOS clause is to prevent a pass through of the contract to a large business. I think using contract labor is consistent with this intent.

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Vern – My thought is to hold SBA responsible for what they are charged to do.

First is it not clear by the language of 13 CFR 125.6 that not meeting the limitation is a responsibility matter?   I clearly understand that for breach of other terms and conditions that a CO has latitude but in the case of the limitation clause it seems clear they are either responsible or not?

The route is plausible when you couple a potential default of a SB with the requirements of FAR 49-402-3(e)(4) which states –

“If the contractor is a small business firm, the contracting officer shall immediately provide a copy of any cure notice or show cause notice to the contracting office’s small business specialist and the Small Business Administration Regional Office nearest the contractor. The contracting officer should, whenever practicable, consult with the small business specialist before proceeding with a default termination (see also 49.402-4).”

So with more detail…cure notice/show cause to the contractor for failure to meet the limitation, stating they could be considered not responsible to complete the contract,  copy to SBA with a request for review with regard to a Certificate.  Ball is in SBA’s court.   SBA does not provide the Certificate, T4D and request to SBA to apply penalties.

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Carl:

Quote

First is it not clear by the language of 13 CFR 125.6 that not meeting the limitation is a responsibility matter?

Yes, that's clear. During proposal evaluation a prospective contractor's proposed compliance is a matter of responsibility, as opposed to responsiveness or acceptability.

But we're talking about after award. The concept of responsibility applies to prospective contractors, not to actual contractor performance, and SBA has no role in enforcing the Limitations on Subcontracting contract clause.

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12 minutes ago, C Culham said:

responsible to complete the contract

PepeTheFrog has not heard about this concept (imposed after award). C Culham, have you ever found enforced this concept? If so, what were the circumstances? PepeTheFrog shares Vern Edwards' point of view-- rather than bring up the matter of responsibility:

19 hours ago, Vern Edwards said:

If the CO knew that the contractor was in noncompliance, why not simply declare them in default on that basis?

It seems like C Culham wants to bring SBA into the picture. Is that accurate, if so, why? As a practical matter, PepeTheFrog points out that SBA is slow and "swamped." Good luck getting any of the standard requests in a timely fashion, let alone adding another duty to SBA's plate.

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Pepe - Admittedly I have not enforced the concept but it seems to make sense as I thought about all the concerns expressed and personal experiences I had many years back in dealing with the limitation issue (SBA for 15 years).  

SBA needs to be brought in as it is their civil penalty provision of the CFR that could/should be applied for failure to meet the limitation.

Specific to your "Good Luck" statement it was after all SBA who developed their regulations so what is the problem with putting it on the their plate?    It sure would be interesting and fun to give it a whirl one time to see what transpires.  

PS - As to timely remember this - FAR 19.602-49(c) - discusses timely response, one would think it would apply in  a pre/post scenario?

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29 minutes ago, Vern Edwards said:

But we're talking about after award. The concept of responsibility applies to prospective contractors, not to actual contractor performance, and SBA has no role in enforcing the Limitations on Subcontracting contract clause.

Vern - I get hung up here....FAR 19.104-3(d)(2) A small business that is unable to comply with the limitations on subcontracting at 52.219-14 may be considered nonresponsible.  When read with this - 13 CFR 125.6(h) - it seems SBA has to be involved.    I guess it all boils down to this - what prevents a post award determination of responsibility?   Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not? 

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6 minutes ago, C Culham said:

Can't a CO who awards a contract thinking a contractor is responsible and then gains further facts that leads to determination that they are not, change their mind and go the route to in the end T4D a contractor?   If not why not? 

They cannot because there is a contract that is already signed-- the contracting officer must wait for a breach of contract, rather than terminate for default based on their changed opinion regarding responsibility.

Responsibility helps prevent the award to contractors who will not perform. If the contracting officer changes his mind about the responsibility (ability to perform) after award, so what? The horse has left the barn. If the contracting officer is wrong, the contractor will perform-- no problem. If the contracting officer is correct, the contractor will not perform (breach the contract). There are remedies for breach of contract, e.g. termination.

PepeTheFrog wonders, C Culham, if you are hinting at suspension and debarment.

26 minutes ago, C Culham said:

it was after all SBA who developed their regulations so what is the problem with putting it on the their plate?

PepeTheFrog understands the sentiment, but SBA is notorious for putting poorly considered, poorly drafted, tardy, and overly burdensome regulations on the plate of the contracting community. Congress passes a statute that concerns small business and contracting. SBA moves first, implementing it in regulation. When it gets to the FAR implementation (for actual contracting), then SBA throws up its hands and says, "You're contracting! Figure it out."

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