Limitations on Subcontracting: Another Trap or an Opportunity? Government Contractors Assistance & Resource Line LLC

Transcription

1 Limitations on Subcontracting: Another Trap or an Opportunity?

2 INTRODUCTION 2

3 Panelists Carl A. Gebo is the President and Founder of the Government Contractors Assistance & Resource Line LLC (GCARL) and a partner at the Gebo Law Group, a Government Contracts Law Firm. Roderick N. Hagen is a Senior Project Engineer with Lockheed Martin Space Systems Company at Cape Canaveral Air Force Station, Florida and a GCARL Contributor. Rod has experience as an owner and program manager for multiple SDVOSBs, WOSBs, HUBZone SBs, and 8(a) SBs 3

4 Our Discussion 1) Review of regulations 2) Identify applicable limitations by socio-economic category 3) Review changes proposed by SBA 4) Identify strategies to address 5) Review accounting difficulties 6) Ostensible subcontractor considerations 7) Consequences of non-compliance 4

5 Review of Regulations I. Reasons for Limitations on Subcontracting A. Assure target socio-economic small business entities perform a significant portion of the contract work B. Minimize small business front companies to procure work for large businesses 5

6 Review of Regulations II. As prescribed by FAR Part 19, applicable FAR clauses: A. FAR Notice of HUBZone Set-Aside or Sole Source Award B. FAR Limitations on Subcontracting (Total Small Business and 8(a)s) C. FAR Notice of Service-Disabled Veteran-Owned Small Business Set-Aside D. FAR Notice of Set-Aside for Economically Disadvantaged Women-Owned Small Business Concerns E. FAR Notice of Set-Aside for Women-Owned Small Business Concerns Eligible Under the WOSB Program 6

7 Review of Regulations III. Limitation Requirement (generalized) - A. Services At least 50% of the cost of contract performance incurred for personnel shall be expended for employees of the concern B. Supplies At least 50% of the cost of manufacturing the supplies, not including the cost of materials C. General construction The concern will perform at least 15% of the cost of the contract, not including the cost of materials, with its own employees D. Construction by special trade contractors The concern will perform at least 25% of the cost of the contract, not including the cost of materials, with its own employees IV. Variations: A. For SDVOSBs, the requirement may be met by any combination of SDVOSBs B. For HUBZone SBs, in addition to the above requirements, at least 50% of the cost of the contract incurred for personnel will be spent on HUBZone SB employees (Prime or sub) 7

8 Strategies to Address 8

9 Strategies to Address I. Teaming Agreements A. Identify anticipated percentage of work to be performed by Prime/Sub, include % of Awarded Contract to be spent on each similarly situated entity B. Identify scope of work to be performed by each C. Check for reasonableness D. Demonstrate mutual commitment to satisfy limitation requirement E. Include solicitation number II. Compensation rates A. Requirement relates to COSTS incurred for personnel, not labor-hours or headcount B. Higher-rate employees sway the percentage quickly C. Direct vs. indirect employees III. Employee variations A. Evaluate status to goal when adding personnel B. Consider transfer of employees C. Independent Contractors (1099s) will not count as employees of Prime 9

10 Strategies to Address IV. Know your accounting A. Apparent inconsistency in regulatory language is a problem Ref. 13 CFR 125.6(b) or FAR (c) 1) Services cost of contract performance incurred for personnel 2) Supplies cost of manufacturing the supplies, not including the cost of materials 3) Gen. Constr. cost of the contract, not including the cost of materials, with its own employees 4) Trade Constr. cost of the contract, not including the cost of materials, with its own employees B. Ref. 13 CFR 125.6(e) Definitions is helpful, specifically: 2) Cost of contract performance incurred for personnel. Direct labor costs and any overhead which has only direct labor as its base, plus the concern s G&A rate multiplied by the labor cost C. So how does the accounting work? 1) Lack of guidance from SBA / DCAA 2) Hundreds of decisions from COFC, BCAs, GAO, OHA addressing compliance but NO clear direction on calculation of cost of contract performance incurred for personnel 10

11 Strategies to Address IV. Know your accounting (continued) D. Rod s take on it Percentage of contract performance incurred for personnel A x 100% where: A = Prime cost incurred for personnel A+B B = Subcontractor(s) cost incurred for personnel Easy enough? But look closer at A and B? Per 13 CFR 125.6(e), each should be direct labor costs and any overhead which has only direct labor as its base, plus the concerns G&A Therefore: C x 100% where: C = Prime Direct Labor Cost + Labor portion of OH + G&A C+D D = S/C Direct Labor Cost + S/C Labor portion of OH + S/C G&A Usually, the OH and G&A are expressed as a percentage, so E E+F x 100% where: E = DL x (1 + LOH%) x (1 + G&A%) F = S/C DL x (1 + S/C LOH%) x (1 + S/C G&A%) Note: Be sure that LOH ONLY includes the direct labor portion of overhead 11

12 Strategies to Address IV. Know your accounting (continued) D. Rod s take on it Not quite done E E+F x 100% where: E = DL x (1 + LOH%) x (1 + G&A%) F = S/C DL x (1 + S/C LOH%) x (1 + S/C G&A%) Observation: IF the prime and sub(s) LOH% and G&A% are the same, the result is not different that the original A BUT: A+B The prime s LOH% and G&A% also apply to the S/C s costs. Therefore we must add a factor to both the numerator and denominator: E+G E+F+G x 100% where: G = (F x LOH%) x (F x (1 + LOH%) x G&A%) I think we re there! (Shout-out to Vernon J. Edwards of The FAR Bootcamp for (unknowingly) contributing to the calculation methodology via WIFCON) 12

13 Strategies to Address E+G IV. Know your accounting (continued) E D. Rod s take on it DONE! So the percentage of contract performance incurred for personnel is simply: (prime direct labor + labor portion of prime overhead + G&A) + (labor portion of prime overhead and G&A on total subcontractor labor costs) All of the above + (subcontractor direct labor + subcontractor labor portion of overhead + subcontractor G&A) Simple right? E. Other considerations 1) This is only one methodology / opinion 2) Note that Profit (or fee) is not included in the calculation 3) Lack of visibility into subcontractors costs 4) Many SBs don t have separate OH and G&A pools 5) May need accountants help separating labor portion of OH 6) TIP: Satisfy with DLR and the calculation may not be necessary F G 13

14 Proposed Changes 14

15 Proposed Changes I National Defense Authorization Act (NDAA) A. Signed into law Jan. 3, 2013 B. Introduces similarly situated entities rule, similar to SDVOSB limitation on subcontracting requirement, to apply to all SB socio-economic categories C. Eliminates ostensible subcontractor claims for similarly situated entities D. Applies limitation to contract amounts paid, not just labor costs, for contracts for Services or Supplies E. No apparent change to construction or construction trade limitations on subcontracting F. NOT enabled by SBA regulation or FAR revisions YET! II. SBA Proposed Rule, published 29 Dec 2014 A. Enacts 2013 NDAA B. Also eliminates 50% requirement for HUBZone SBs for construction and construction trades C. Comment period closed 27 Feb 2015 D. No word from SBA since?!?! 15

16 Ostensible Subcontractor Considerations 16

17 Ostensible Subcontractor Considerations 1) Proposed rule change would allow prime contractors to meet limitations on subcontracting standards with a similarly situated entity without running afoul of ostensible subcontractor rule 2) Remember primary and vital even if compliant with limitations on subcontracting can still be found to be an ostensible subcontractor 17

18 Non-Compliance 18

19 Non-Compliance I. Treated as a misrepresentation under 15 USC 645(d) A. Adverse past performance rating (CPARS, CCASS, ACASS, Etc.) B. Possible suspension and/or debarment C. Ineligibility for SB participation for up to 3 years D. Monetary fine, the greater of $500,000 or the amount spent, in excess of permitted levels, by the entity on subcontractors 19

20 QUESTIONS? 20

21 CONTACT US Government Contractors Assistance & Resource Line LLC 1201 Peachtree Street 400 Colony Square, Suite 200 Atlanta, Georgia (404) Government Contractors Assistance & Resource Line LLC 21