[Federal Register Volume 81, Number 104 (Tuesday, May 31, 2016)]
[Rules and Regulations]
[Pages 34243-34265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12494]



[[Page 34243]]

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SMALL BUSINESS ADMINISTRATION

13 CFR Parts 121, 124, 125, 126 and 127

RIN 3245-AG58


Small Business Government Contracting and National Defense 
Authorization Act of 2013 Amendments

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: This rule amends the U.S. Small Business Administration's (SBA 
or Agency) regulations to implement provisions of the National Defense 
Authorization Act of 2013, which pertain to performance requirements 
applicable to small business and socioeconomic program set-aside 
contracts and small business subcontracting. This rule also amends 
SBA's regulations concerning the nonmanufacturer rule and affiliation 
rules. Further, this rule allows a joint venture to qualify as small 
for any government procurement as long as each partner to the joint 
venture qualifies individually as small under the size standard 
corresponding to the NAICS code assigned in the solicitation.

DATES: This rule is effective on June 30, 2016.

FOR FURTHER INFORMATION CONTACT: Michael McLaughlin, Office of Policy, 
Planning and Liaison, 409 Third Street SW., Washington, DC 20416; (202) 
205-5353; [email protected].

SUPPLEMENTARY INFORMATION: 

Introduction

    SBA published a proposed rule regarding these changes in the 
Federal Register on December 29, 2014 (79 FR 77955), inviting the 
public to submit comments on or before February 27, 2015. This comment 
period was extended through April 6, 2015, by notice in the Federal 
Register published on March 9, 2015 (80 FR 12353). SBA also conducted 
tribal consultations in Washington, DC (February 26, 2015), Catoosa, OK 
(April 20, 2015), and Anchorage, AK (April 22, 2015), in which SBA 
accepted comments on the proposed rule. Transcripts of these 
consultations are in the rule docket (SBA-2014-0006, viewable on 
Regulations.gov using the docket number). SBA received a total of 216 
comments on the proposed rule. Twenty-eight comments were supportive of 
the rule generally without referencing specific sections of the rule. 
Seventeen of those generally supportive comments advocated for fast 
implementation of the rule. Several of these commenters suggested that 
SBA issue this rule as an interim final rule. Once SBA has published a 
proposed rule, the next step in the process is to analyze public 
comments and publish a final rule. Publishing an ``interim final rule'' 
after publishing a proposed rule would not expedite the process to 
finalize the provisions contained in the proposed rule. As such, SBA 
has not followed that recommendation and is publishing this rule as a 
final rule. Sixteen comments requested an extension of time for the 
submission of comments. An extension of the comment period was provided 
through April 6, 2015, and SBA believed that a further extension was 
not needed. Seven comments did not support the rulemaking generally and 
did not reference specific sections that were opposed. Some of these 
comments were related to regulations not subject to changes in the 
proposed rule and were considered outside the scope of this rulemaking. 
SBA's discussion below summarizes the proposed rule, the comments 
related to each section of the proposed rule and SBA's responses.

Summary of Proposed Rule, Comments, and SBA's Responses

Procurement Center Representative Responsibilities

    Section 1621 of the National Defense Authorization Act of 2013 
(NDAA), Public Law 112-239, 126 Stat. 1632 (Jan. 2013), revised the 
Small Business Act regarding the responsibilities of Procurement Center 
Representatives (PCRs). Section 1621 clarifies that PCRs have the 
ability to review barriers to small business participation in Federal 
contracting and to review any bundled or consolidated solicitation or 
contract in accordance with the Small Business Act. SBA proposed to 
amend 13 CFR 125.2(b)(1)(i)(A), based on the changes in Section 
1621(c)(6)(H) of the NDAA. SBA also proposed to add language to Sec.  
125.2(b)(1)(i)(A) and to Sec.  125.2(b)(1)(ii), which clarifies that 
PCRs advocate for the maximum practicable utilization of small business 
concerns in Federal contracting, including advocating against the 
unjustified consolidation or bundling of contract requirements.
    Pursuant to Section 1621(c)(6)(G) of the NDAA, SBA proposed new 
Sec.  125.2(b)(1)(iv), which states that PCRs will consult with the 
agency's Office of Small and Disadvantaged Business Utilization (OSDBU) 
and Office of Small Business Program (OSBP) Director regarding an 
agency's decision to convert an activity performed by a small business 
concern to an activity performed by a Federal employee. SBA also 
proposed new Sec.  125.2(b)(1)(v) pursuant to the language enacted by 
Section 1621(c)(6)(F) of the NDAA, which allows PCRs to receive 
unsolicited proposals from small business concerns and to provide those 
proposals to the appropriate agency's personnel for review and 
disposition.
    SBA proposed to amend Sec.  125.2(b)(1) and (2), which pertain to 
Breakout PCRs (BPCRs). Sections 1621(e) and (f) of the NDAA effectively 
eliminate the statutory authority for the separate BPCR role. As a 
result, SBA proposed to reassign the responsibilities currently held by 
BPCRs to PCRs. SBA proposed to add Sec.  125.2(b)(1)(i)(F), which 
states that PCRs also advocate full and open competition in Federal 
contracting and recommend the breakout for competition of items and 
requirements which previously have not been competed. SBA also proposed 
to eliminate Sec.  125.2(b)(2) that provided guidance on the role and 
responsibilities of BPCRs, and redesignate current Sec.  125.2(b)(3) as 
the new Sec.  125.2(b)(2) and remove any reference to BPCRs from that 
paragraph.
    SBA received 13 comments regarding its proposed changes to Sec.  
125.2. Ten of these comments were supportive of the changes to this 
section. One commenter suggested that SBA clarify the proposed language 
in Sec.  125.2(b)(1)(i)(A), which states ``This review includes 
acquisitions that are Multiple Award Contracts where the agency has not 
set-aside all or part of the acquisition or reserved the acquisition 
for small businesses.'' This commenter suggested that SBA delete the 
words ``or part'' to make it clear that PCRs can review any Multiple 
Award Contract that is not 100% set-aside for small business 
competition. SBA is not adopting this recommendation because the 
proposed language states that PCRs can review Multiple Award Contracts 
that are not entirely set aside for small businesses, meaning partially 
set-aside. Furthermore, if SBA eliminated ``or part'' it would indicate 
that PCRs cannot review Multiple Award Contracts that are entirely set 
aside for small businesses, which is within the PCRs responsibilities.
    Another commenter suggested that SBA should meet with contracting 
officers to assist with setting aside contracts for small businesses. 
It is the role of the PCR to review procurements that are not set aside 
for small businesses. PCRs are often located at the procuring activity 
and routinely interface with contracting officers regarding whether to 
set aside

[[Page 34244]]

acquisitions for small business competition. It is already part of 
their responsibilities to meet with contracting officers and discuss 
acquisition planning. As such, it is not necessary to adopt this 
suggested change.
    Another commenter suggested that the term ``acquisition'' as used 
in Sec.  125.2 should be changed to ``acquisition, including bridge, 
interim, and follow-on contracts.'' The term ``acquisition'' is defined 
broadly in section 2.101 of the Federal Acquisition Regulation (FAR) to 
include ``award of contracts.'' The commenter is referencing specific 
types of contracts that are included in the FAR definition of 
``acquisition.'' SBA believes that this clarification is not necessary 
and does not adopt it in this final rule.
    Another commenter suggested that PCRs should unbundle sole source 
contracts that are made to incumbent vendors in order to allow the 
agency time to competitively re-procure the goods or services. The 
proposed rule directly addresses this concern by providing PCRs with 
the ability to advocate against consolidation or bundling of contract 
requirements and reviewing any justification provided for such bundling 
or consolidation. The same commenter also suggested that a prime 
contract not be awarded on a sole source basis unless the prime 
contractor agrees to retain its subcontractors under the previous award 
and incorporates the small business plan associated with the previous 
award. SBA does not have the authority to mandate which subcontractors 
a prime contractor chooses to include in a subcontracting plan or to 
mandate that a prime contractor incorporate a particular subcontracting 
plan into its offer, and therefore SBA is not adopting this suggestion.
    One commenter requested clarification of the language proposed in 
Sec.  125.2(b)(1)(i)(F) stating, ``PCRs also advocate competitive 
procedures and recommend the breakout for competition when 
appropriate.'' The commenter raised concerns that this language will 
discourage contracting officers from utilizing the sole source 
authority provided for the 8(a) Business Development (BD) program, the 
Women-Owned Small Business (WOSB) program and the HUBZone program. The 
commenter suggests that SBA clarify what a PCR would consider as 
``appropriate'' in the decision to recommend competition, and if such a 
decision is made, that contracting officers and PCRs document this 
decision in the contract file along with an explanation for why 
competition is considered more appropriate than a small business 
program sole source award. The language referenced by the commenter is 
a BPCR responsibility that SBA is transferring to PCRs due to the 
statute's elimination of the BPCR role. In addition, PCRs provide 
contracting officers with guidance on the availability of sole source 
and competitive options, but the contracting officer has the discretion 
to choose an acquisition program or method, in accordance with SBA's 
guidance on parity.
    Another commenter noted that PCRs will have to coordinate with 
agency officials to implement the NDAA's requirement, set forth at 
Sec.  125.2(b)(1)(iv), that PCRs consult with agency OSDBUs regarding 
an agency's decision to convert an activity performed by a small 
business concern to an activity performed by a Federal employee. The 
statute provides that the PCR will consult with the OSDBU. SBA 
understands that the PCR and OSDBU will consult with other agency 
officials, as necessary. However, SBA does not believe that additional 
clarification is necessary and therefore SBA adopts the proposed 
language in this final rule.
    Section 1623 of the NDAA requires that each Federal department or 
agency provide opportunities for the participation of small business 
concerns during acquisition planning processes and in acquisition 
plans. This section also requires that each Federal department or 
agency invite the participation of the appropriate OSDBU Director in 
acquisition planning processes and provides that Director with access 
to acquisition plans. SBA incorporates the exact statutory text from 
Section 1623 of the NDAA into 13 CFR 125.2(c)(1) by adding new 
paragraphs (vi) and (vii).

Limitations on Subcontracting

    Section 1651 of the NDAA, as codified at 15 U.S.C. 657s, requires 
that the limitations on subcontracting for full or partial small 
business set-aside contracts, HUBZone contracts, 8(a) BD contracts, 
Service-Disabled Veteran-Owned (SDVO) Small Business Concern (SBC) 
contracts, and WOSB and Economically Disadvantaged Women Owned Small 
Business (EDWOSB) contracts, be evaluated based on the percentage of 
the overall award amount that a prime contractor spends on its 
subcontractors. Significantly, the NDAA excludes from the limitations 
on subcontracting calculation the percentage of the award amount that 
the prime contractor spends on similarly situated entity 
subcontractors. Specifically, the NDAA deems work done by similarly 
situated entities not to be subcontracted work for purposes of 
complying with the limitations on subcontracting requirement. Thus, 
work done by a similarly situated entity is counted in determining 
whether the applicable limitation on subcontracting is met. When a 
contract is awarded pursuant to a small business set-aside or 
socioeconomic program set-aside or sole source authority, a similarly 
situated entity subcontractor is a small business concern subcontractor 
that is a participant of the same SBA program that qualified the prime 
contractor as an eligible offeror and awardee of the contract.
    Currently, SBA's regulations contain different terms for compliance 
with the performance of work requirements based on the type of small 
business program set-aside at issue. The method for calculating 
compliance not only varies by program set-aside type, but also based on 
whether the acquisition is for services, supplies, general 
construction, or specialty trade construction. Section 1651 of the NDAA 
creates a shift from the concept of a required percentage of work to be 
performed by a prime contractor to the concept of limiting a percentage 
of the award amount to be spent on subcontractors. The goal is the 
same: To ensure that a certain amount of work is performed by a small 
business concern (SBC) that qualified for a small business program set-
aside or sole source procurement due to its socioeconomic program 
status. The Government's policy of promoting contracting opportunities 
for small businesses, HUBZone SBCs, SDVO SBCs, WOSBs/EDWOSBs, and 8(a) 
SBCs is seriously undermined when firms pass on work in excess of 
applicable limitations to firms that are other than small or that are 
not otherwise eligible for specific types of small business contracts. 
SBA has revised all references to ``performance of work'' requirements 
found in parts 121, 124, 125, 126, and 127 to ``limitations on 
subcontracting.''
    SBA proposed to totally revise Sec.  125.6 to take into account the 
new definition and calculation for the limitations on subcontracting as 
described in Section 1651 of the NDAA. Additionally, SBA reorganized 
and simplified this section for easier use. Proposed Sec.  125.6(a) 
explains how to apply the limitations on subcontracting requirements to 
small business set-aside contracts. Instead of providing different 
methods of determining compliance based on the type of small business 
set-aside program at issue and the type of good or service sought, 
Section 1651(a) of the NDAA provides one method for determining 
compliance that is shared by almost all

[[Page 34245]]

applicable small business set-aside programs, but varies based on 
whether the contract is for services, supplies or products, general 
construction, specialty trade construction, or a combination of both 
services and supplies.
    The approach described in Sections 1651(a) and (d) of the NDAA is 
to create a limit on the percentage of the award amount received by the 
prime contractor that may be spent on other-than-small subcontractors. 
Specifically, the NDAA provides that a small business awarded a small 
business set-aside, 8(a), SDVO small business, HUBZone, or WOSB/EDWOSB 
award ``may not expend on subcontractors'' more than a specified 
amount. However, as noted below, work done by ``similarly situated 
entities'' does not count as subcontracted work for purposes of 
determining compliance with the limitation on subcontracting 
requirements. Proposed Sec.  125.6(a)(1) and (a)(2) addressed the 
limitations on subcontracting applicable to small business set-aside 
contracts requiring services or supplies. The limitation on 
subcontracting for both services and supplies is statutorily set at 50% 
of the award amount received by the prime contractor. See 15 U.S.C. 
657s(a).
    Proposed Sec.  125.6(a)(3) addressed how the limitation on 
subcontracting requirement would be applied to a procurement that 
combines both services and supplies. This provision intended to clarify 
that the contracting officer's (CO) selection of the applicable NAICS 
code will determine which limitation of subcontracting requirement 
applies. Proposed Sec.  125.6(a)(4) and (5) addressed the limitations 
on subcontracting for general and specialty trade construction 
contracts. SBA proposed to keep the same percentages that currently 
apply: 15% for general construction and 25% for specialty trade 
construction.
    SBA received 115 comments regarding proposed Sec.  125.6(a). The 
overwhelming majority of these comments requested that SBA allow 
contractors to exclude the ``cost of materials'', as that term is 
currently defined in Sec.  125.1(i), from the limitations on 
subcontracting calculation for all contracts. SBA notes that the cost 
of materials has never been, and was not proposed to be, a term that 
applies to service contracts. Historically and as proposed, the term 
cost of materials is applicable to supply, construction, or specialty 
trade construction set-aside contracts. ``Cost of materials'' is 
currently excluded from the performance of work requirements and SBA 
did not intend to remove this exclusion in proposed paragraph 125.6(a). 
The exclusion of ``cost of materials'' from the limitations on 
subcontracting for supply, construction, and specialty trade 
construction procurements is included in this final rule. Several 
commenters suggested that SBA extend this exclusion to procurements 
assigned a service NAICS code, but, SBA does not believe that this 
change is needed. As discussed below, because the limitations on 
subcontracting for a services contract apply only to the services 
portion of the contract, any ``cost of materials'' would not be part of 
the services to be provided through the contract and, thus, would be 
excluded from the limitations on subcontracting analysis on that basis.
    For a mixed contract (i.e., one in which both supplies and services 
are being procured), commenters believed that the limitation on 
subcontracting should apply only to that portion of the requirement 
identified as the primary purpose of the contract. In other words, 
where, for example, a contracting officer has assigned a services NAICS 
code to a requirement that has both a services and supply component, 
the commenters believed that the limitation on subcontracting should 
apply only to the services portion of the work to be performed. In our 
view, Section 46(a)(3) of the Small Business Act, 15 U.S.C. 657s(a)(3), 
which was established by Section 1651 of the NDAA, provides the 
necessary guidance for mixed contracts. The CO must first determine 
which category, services or supplies, has the greatest percentage of 
the contract value, and then assign the appropriate NAICS code. The 
corresponding limitations on subcontracting will apply to the contract, 
depending on whether the CO has selected a supply NAICS code or a 
services NAICS code. Thus, the statutory authority authorizes that the 
limitations on subcontracting apply only to that portion of the 
requirement identified as the primary purpose of the contract. SBA has 
clarified that intent in this final rule, and has moved the 
requirements pertaining to mixed contracts to Sec.  125.6(b). 
Therefore, where a procurement combines supplies and services, the 
limitations on subcontracting apply only to subcontracts that 
correspond to the principal purpose of the prime contract. For a 
contract principally for services, but which also requires supplies, 
this means that the prime contractor or its similarly situated 
subcontractors cannot subcontract more than 50 percent of the services 
to other than small concerns. However, the prime contractor can 
subcontract all of the supply components to any size business.
    Several commenters also recommended that SBA change the current 
definition of ``cost of materials'' to include any service or product 
that cannot be procured from a small business. Other commenters 
recommended that very specific types of services be included in the 
definition of ``cost of materials'' such as transportation when 
procured in the performance of an environmental remediation 
procurement. SBA did not propose to change the definition of ``cost of 
materials'' and does not believe that a change is necessary or required 
to implement NDAA 2013.
    One commenter requested clarity on whether contractors can exclude 
from the limitations on subcontracting the non-service costs associated 
with a procurement for services. As noted above, SBA believes that only 
the services portion of a requirement identified as a services 
requirement are considered in determining compliance with the 
limitation on subcontracting requirements. This means that any costs 
associated with supply items are excluded from that analysis. However, 
all costs associated with providing the services, including any 
overhead or indirect costs associated with those services, must be 
included in determining compliance. This final rule clarifies this 
application. SBA has also added another example to Sec.  125.6(a)(3) 
that involves both supplies and services to clarify how the limitations 
on subcontracting apply in these circumstances.
    As noted above, the NDAA prohibits subcontracting beyond a certain 
specified amount for any small business set-aside, 8(a), SDVO small 
business, HUBZone, or WOSB/EDWOSB contract. Section 1651(b) of the NDAA 
creates an exclusion from the limitations on subcontracting for 
``similarly situated entities.'' In effect, the NDAA deems any work 
done by a similarly situated entity not to constitute 
``subcontracting'' for purposes of determining compliance with the 
applicable limitation on subcontracting. A similarly situated entity is 
a small business subcontractor that is a participant of the same small 
business program that the prime contractor is a certified participant 
and which qualifies the prime contractor to receive the award. 
Subcontracts between a small business prime contractor and a similarly 
situated entity subcontractor are excluded from the limitations on 
subcontracting calculation because it does not further the goals of 
SBA's government contracting and business development programs to 
penalize small business prime contract recipients that benefit

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the same small business program participants through subcontract 
awards.
    The proposed rule identified SBA's concern with determining 
compliance with the limitations on subcontracting by looking solely to 
the first tier of the contracting process (agreements between the prime 
contractor and its direct subcontractors). If all that was looked at 
was the first tier subcontract, that first tier subcontractor could in 
turn pass all of its performance on to a large or otherwise not 
similarly situated entity through a second subcontract. SBA believes 
that the intent of the changes in the NDAA were to ensure that the 
benefits of set-aside contracts flow to the intended beneficiaries. SBA 
does not believe that an intended consequence of the change was to make 
it easier to divert these benefits to ineligible entities by merely 
moving contracts down one or two tiers in the contracting process. As 
such, the proposed rule retained a requirement that firms benefiting 
from contracts, and their similarly situated subcontractors perform a 
required amount of work on the contract themselves. SBA believes that 
requiring firms to perform significant portions of the work, as well as 
to retain a significant portion of the contract award, will continue to 
help ensure that the benefits from these contracts flow to the intended 
parties.
    SBA requested comments on this issue, including whether there may 
be unintended consequences, as well as comments about SBA's proposed 
solution. SBA also requested comments on whether prime contractors 
should be required to report to the contracting officer concerning 
meeting the performance of work requirements, and comments concerning 
the frequency and method of reporting.
    SBA received three comments regarding SBA's proposal to apply the 
limitations on subcontracting collectively to all similarly situated 
entities that are performing work on the contract and that are counted 
toward the prime contractor's percentage of performance. Two commenters 
supported SBA's proposed approach and one commenter opposed this 
approach, and suggested that SBA apply the limitations on 
subcontracting only to the prime contractor and the first tier 
subcontractor. Applying the limitations on subcontracting to only the 
prime contractor and first tier subcontractor creates the possibility 
that the first tier subcontractor may subcontract 100% of the work it 
received from the prime to an entity that is not similarly situated as 
the prime contractor. SBA remains concerned that this would create a 
loophole for entities that are not small business concerns and would 
not have qualified to receive the prime contract to benefit, as 
subcontractors, from government contracts that are set aside for 
performance by small business concerns. To address these concerns, SBA 
will apply the limitations on subcontracting collectively to the prime 
and any similarly situated first tier subcontractor, and any work 
performed by a similarly situated first tier subcontractor will count 
toward compliance with the applicable limitation on subcontracting. Any 
work that a similarly situated first tier subcontractor subcontracts, 
to any entity, will count as subcontracted to a non-similarly situated 
entity for purposes of determining whether the prime/sub team performed 
the required amount of work. In other words, work that is not performed 
by the employees of the prime contractor or employees of first tier 
similarly situated subcontractors will count as subcontracts performed 
by non-similarly situated concerns.
    Proposed Sec.  125.6(b)(1) required prime contractors to enter a 
written agreement with each similarly situated entity that identifies 
the similarly situated entity and the percentage of work to be 
performed by that entity. The proposed rule provided that the written 
agreement must be signed by the similarly situated entity and provided 
to the contracting officer with the prime contractor's offer. Proposed 
Sec.  125.6(b)(2) stated that it is immaterial whether the specific 
subcontractors identified in the written agreement satisfy the 
percentage of work identified, as long as all similarly situated 
entities collectively, along with the prime contractor, satisfy the 
performance of work requirements. Proposed Sec.  125.6(b)(3) stated 
that a prime contractor may be debarred for a violation of the spirit 
and intent of this paragraph.
    SBA received forty-seven comments related to its proposed Sec.  
125.6(b), which described how subcontracts to similarly situated 
entities will be excluded from the prime contractor's limitations on 
subcontracting. Eight of these comments generally supported Sec.  
125.6(b) as proposed. Four of these comments were considered outside 
the scope of this rulemaking as they advocated for an interim final 
rule to apply the exclusion of subcontracts to similarly situated 
entities from the limitations on subcontracting. One comment generally 
opposed proposed Sec.  125.6(b), but did not have any suggested 
alternatives.
    Twenty-three of the forty-seven comments received were related to 
proposed Sec.  125.6(b)(1), which discussed the details that must be 
included in the required written agreements between the prime 
contractor and its similarly situated entity subcontractors. Six of 
these commenters supported the concept of a required written agreement 
but disagreed with specific aspects of the agreement such as 
identifying the proposed similarly situated entity subcontractors and 
identifying the percentage of work to be performed by those 
subcontractors. Seventeen of the commenters opposed the requirement for 
any written agreement between a prime contractor and a similarly 
situated entity subcontractor because it would be impossible to know 
their identity and possible percentage of performance in advance of the 
award and because it would be unnecessarily burdensome on small 
business prime contractors to draft and enter these agreements. SBA 
also received comments concerning how to address the substitution of 
one subcontractor for another, or a decision by the prime contractor 
after award to either perform the work itself or subcontract work to a 
similarly situated entity.
    In response to these comments, SBA has decided not to require a 
written agreement in order for a prime contractor to rely on the work 
to be performed by similarly situated entities. For many years SBA's 
rules have allowed similarly situated entities to be counted towards 
the limitations on subcontracting requirements under SDVO or HUBZone 
set-asides or sole source awards, without also requiring a separate 
written agreement. There is no evidence that this long-standing policy 
has been difficult to understand or administer, and the rule change 
that limits subcontracting without regard to cost incurred for 
personnel should make it easier to track and identify subcontracts, 
especially in light of other existing requirements to report on 
subcontracts, such as FAR 52.204-10 (48 CFR 52.204-10). (Reporting 
Executive Compensation and First-Tier Subcontract Awards). In addition, 
SBA is concerned that requiring a written agreement would cause an 
administrative burden on small business concerns, which would in turn 
cause them to utilize this tool less often, for fear of violating the 
written agreement or because they would need to constantly amend the 
agreement based on modifications with respect to team members or to 
percentages of work performed by individual team members. Further, 
requiring a written agreement prior to offer would limit a firm's 
ability to decide to utilize a similarly situated entity after award 
and during contract

[[Page 34247]]

performance. Many of the commenters pointed out that it may be 
difficult to determine whether a subcontractor will or will not be used 
on certain contracts, especially indefinite delivery indefinite 
quantity task or delivery order contracts. Small business concerns 
should have the discretion to run their business and perform contracts 
as they see fit, and the discretion to subcontract or not subcontract 
at any point during contract performance, provided they comply with the 
overall performance requirements. Further, SBA and agencies do not have 
the resources to review agreements or amendments to those agreements.
    SBA received several comments in response to its request for 
comments on whether prime contractors should be required to report to 
the contracting officer on their compliance with the limitations on 
subcontracting. Eight commenters supported mandatory compliance 
reporting, and five of those commenters recommended that the reporting 
be made at the end of the contract term. Three of the supportive 
commenters recommended compliance reporting on a quarterly or annual 
basis. Three commenters opposed mandatory compliance reporting because 
it would be too burdensome on small business concerns. One commenter 
suggested that SBA use its auditing and investigating authority to 
determine compliance rather than requiring contractors to report their 
compliance. Another commenter suggested that the only necessary 
compliance reporting should be made in the offer.
    In addition to the requirement for a written agreement, SBA also 
proposed to require compliance reporting from small business concerns 
that rely on similarly situated entities to meet their performance 
obligations under a set aside contract. Notably, SBA did not propose to 
require compliance reporting from all small business concerns (i.e., 
firms that do not rely on similarly situated small business concerns to 
meet their performance obligations). Upon further review, SBA believes 
that this proposal would create a disincentive to utilize this new 
statutory authority. Compliance reporting was not required by the 
statute, and in fact, reliance on similarly situated entities to help 
meet their performance requirements actually makes it easier these 
firms to comply with their obligations. Moreover, requiring a prime 
contractor to report on compliance with the limitations on 
subcontracting when it uses one or more similarly situated entities 
could hamper flexibility for firms during contract performance. For 
example, a firm may initially intend to comply on its own, but may find 
during contract performance that it must rely on one or more similarly 
situated subcontractors to meet its performance obligations. In 
addition, a firm may intend to use one or more similarly situated 
entities to help it meet its performance obligations, but then may 
decide during contract performance that it will perform all of the 
required work with its own employees. These practical realities have 
led us to remove the compliance reporting requirement with respect to 
similarly situated entities. SBA may, in the future, propose a rule 
that requires compliance reporting from all small business concerns, 
not just those that rely on similarly situated entities. However, such 
a change would require notice and a request for public comment that is 
not part of this rulemaking.
    For many years, SBA's regulations have allowed similarly situated 
entities to count towards fulfilling the limitations on subcontracting 
requirements under a HUBZone or SDVO set-aside or sole source contract, 
without a requirement to report to the CO. As discussed above, prime 
contractors are already required to report on subcontracting pursuant 
to FAR clause 52.204-10 (48 CFR 52.204-10). Thus, because SBA is not 
requiring written agreements in this final rule, at this time SBA has 
decided not to require compliance reports from firms that are utilizing 
similarly situated subcontractors. SBA believes that to the extent 
compliance reporting should be required, it should be required from all 
small businesses, not just those that team with similarly situated 
subcontractors. Thus, SBA intends to issue a proposed rule to request 
public comment on the issue of whether all small businesses (and not 
only those that are using similarly situated entities to perform a 
contract) should be required to report on compliance with the 
limitations on subcontracting on set-aside contracts. SBA understands 
the recommendations made by the Government Accountability Office to 
strengthen the monitoring and oversight of the required performance 
percentages for all small businesses that receive set-aside awards, 
including 8(a) contractors, and believes that a separate rulemaking 
should address that issue more appropriately.
    SBA's proposed Sec.  125.6(b) explained that work subcontracted to 
similarly situated entities may be excluded from a prime contractor's 
calculation of its limitation on subcontracting. SBA proposed to 
include three examples to Sec.  125.6(b) to demonstrate how a small 
business concern or Federal agency should apply the exclusion for 
similarly situated entities and determine compliance with the 
limitations on subcontracting. The final rule has redesignated proposed 
Sec.  125.6(b) as Sec.  125.6(c). As mentioned above, in response to 
comments, SBA is adding three more examples to redesignated Sec.  
125.6(c) to clarify how the limitations on subcontracting apply when 
the procurement involves a mix of services and supplies.
    SBA received six comments in response to proposed Sec.  
125.6(b)(3). All six commenters opposed SBA's ability to consider a 
party's failure to comply with the spirit and intent of the subcontract 
with a similarly situated entity as a basis for debarment. These 
commenters argued that the proposed regulation is too vague because it 
is unclear how SBA would demonstrate a violation of the spirit and 
intent, and that the penalty of debarment is too severe. SBA clarifies 
that a contractor's violation of the spirit and intent of a subcontract 
with a similarly situated entity is something SBA may consider as a 
basis for debarment, but is not required to consider for debarment. SBA 
does not take debarment and suspension lightly and understands fully 
the implications of such an action. As such, SBA would not initiate any 
debarment or suspension action unless SBA believed that the 
government's interests needed to be protected. This would happen where, 
for example, a small business prime contractor had no intent to 
actually use similarly situated entities. In such a case, the firm's 
certification would be a misrepresentation to the government, and the 
government could no longer rely on any representations made by the 
firm. SBA would not consider a debarment or suspension action where a 
firm made a good faith representation that it, along with one or more 
similarly situated entities, would meet the performance of work 
requirements and through unforeseen circumstances it failed to do so. 
Additionally, should SBA choose to consider this as a basis for 
debarment, the entity at issue would have an opportunity to respond to 
any allegation with its own arguments and evidence. SBA believes this 
provision is necessary to deter potential fraud, waste, and abuse of 
the prime contractor's ability to exclude similarly situated entity 
work from its limitations on subcontracting. SBA has moved the 
discussion of debarment to redesignated Sec.  125.6(h).
    SBA proposed to relocate the definitions that are relevant to the 
limitations on subcontracting that are currently found in Sec.  
125.6(e) to Sec.  125.1

[[Page 34248]]

with the other definitions that are applicable to part 125. Section 
1651(e) of the NDAA provides the definitions of ``similarly situated 
entity'' and ``covered small business concern.'' Proposed Sec.  
125.1(x) interprets the statutorily prescribed definition for similarly 
situated entity.
    SBA received 34 comments about its proposed definition of similarly 
situated entity. Fifteen of these comments opposed SBA's proposition 
that a small business concern qualifies as a similarly situated entity 
if it qualifies as small for the NAICS code assigned to the prime 
contractor's procurement, in addition to the other requirements 
included in the definition of ``similarly situated entity.'' Three 
commenters requested further clarification of the definition. Two 
commenters supported the definition as proposed. The remaining comments 
were questions regarding the application of the proposed definition to 
procurements for specific types of services or were comments that were 
considered outside the scope of this rulemaking, as they suggested 
changes that were not proposed and are not authorized by the statute. 
For example, one commenter recommended that when a solicitation 
requires the use of a specific subcontractor, that entity should 
qualify as a similarly situated entity, regardless of the 
subcontractor's size or small business program participation. SBA 
believes that this would conflict with the statutory intent that only 
entities that would be eligible as prime contractors may qualify as 
similarly situated entity subcontractors. Another commenter recommended 
that all individuals classified by the Internal Revenue Service as 
independent contractors should be included in the definition of 
similarly situated entity. Again, this would conflict with the 
statutory intent that only contractors who would qualify for the prime 
contract are eligible to count toward the prime contractor's 
performance of work as similarly situated entity provisions. However, 
SBA has clarified in Sec.  125.6(e)(3) that performance by an 
independent contractor is considered a subcontract, and may qualify as 
a similarly situated entity if the contractor meets the relevant 
criteria.
    The majority of the questions related to the application of the 
definition to procurements for architecture and engineering services. 
Often the prime contract is assigned the NAICS code representing 
architecture services and has a size standard that is less than the 
size standard for engineering services. In these cases, the engineering 
services are often subcontracted and commenters were concerned about 
how the engineering firm could qualify as a similarly situated entity 
if it were required to comply with the size standard assigned to the 
prime contract. SBA received other comments which described complex 
procurements involving multiple services. Firms that are small for 
certain types of services would not qualify as small for the NAICS 
assigned to the contract. In response to the comments received, SBA is 
not adopting its proposed definition of ``similarly situated entity'' 
and instead will allow an entity to qualify as a similarly situated 
entity if it is small for the NAICS code that the prime contractor 
assigns to the subcontract. SBA believes that this alteration to the 
definition will address the concerns raised about specific types of 
service procurements. Requiring the subcontractors to be small for the 
size standard assigned to the prime contract would unduly restrict the 
ability of prime contractors to find and use similarly situated 
entities to satisfy the limitations on subcontracting. SBA believes the 
approach adopted in this final rule will increase the ability of small 
business prime contractors to utilize similarly situated entity 
subcontractors. In addition, this approach is consistent with SBA's 
rules which require a prime contractor to assign the NAICS code to a 
subcontract which describes the principal purpose of the subcontract. 
13 CFR 125.3(c)(1)(v).
    In Sec.  125.6(c), SBA proposed to require a certification 
requirement in connection with the limitations on subcontracting 
requirement. However, existing regulations require firms to agree to 
comply with the limitations on subcontracting in connection with a set-
aside contract, including firms that are utilizing similarly situated 
entities, and it is SBA's intent to continue that practice. 
Consequently, SBA's rules do not specifically require certification 
from the prime contractor when utilizing similarly situated entities. 
In order to be awarded a set-aside contract as a small business, the 
prime contractor must agree to comply with the limitations on 
subcontracting in connection with the offer, whether that entails using 
similarly situated entities or not.
    Proposed Sec.  125.6(f) and (h) contained language that is included 
in the current rule and did not contain any proposed changes to that 
language aside from adding new headings to these paragraphs and 
reorganizing this language. These provisions have been redesignated as 
Sec.  125.6(d) and (e) in this final rule. Proposed Sec.  125.6(f) 
discussed HUBZone procurements of commodities. SBA did not receive any 
comments within the scope of this rulemaking that relate to proposed 
Sec.  125.6(f) and SBA is adopting the language of proposed Sec.  
125.6(f) in Sec.  125.6(d). Proposed Sec.  125.6(g) discussed how to 
request a change in the applicable limitation on subcontracting for a 
particular industry. SBA received two comments related to proposed 
Sec.  125.6(g). One comment supported the language and the other 
comment was a question regarding the transition period for industries 
where the limitations on subcontracting percentages do not align with 
industry practices. It is unclear what the commenter is requesting as 
this paragraph does not reference a transition period. This final rule 
adopts the language of proposed Sec.  125.6(g).
    Proposed Sec.  125.6(h) discussed the period of time used to 
determine compliance with the limitations on subcontracting. While SBA 
did not propose a change to the time period used to determine 
compliance, SBA received 15 comments related to this paragraph. Twelve 
of the comments contained suggestions for how to modify the proposed 
language to be less burdensome on small business prime contractors and 
allow prime contractors to have the maximum flexibility to choose and 
manage subcontractors. The majority of these commenters suggested that 
SBA use the entire contract term, the base and all option periods, to 
determine whether the prime contractor has complied with the 
limitations on subcontracting. Other commenters suggested that periodic 
checks of compliance would suffice in addition to checking compliance 
during contract close-out. The remaining commenters believed that the 
current requirement was too onerous on prime contractors to check 
compliance for each task order issued under an IDIQ contract.
    In response to these comments, SBA again emphasizes that 
redesignated paragraph (e) is not a change in policy. It recites the 
policy set forth in a prior SBA rulemaking on multiple award 
contracting, as set forth at Sec.  125.2(e)(2)(iv), but clarifies that 
this policy applies to single award task and delivery order contracts, 
not just multiple award contracts. SBA believes that this provides 
contracting officers with the maximum flexibility to determine the time 
period that will be used for determining compliance with the 
limitations on subcontracting for performance of a task or delivery 
order contract. SBA does not believe it is appropriate for compliance 
to be determined at the end of the contract term, including all option 
periods,

[[Page 34249]]

because it would eliminate the ability to monitor compliance during 
performance and request a proposed corrective action from the 
contractor in order to satisfy the limitations on subcontracting during 
the performance period. When compliance is monitored per base period 
and each option period, or per order in some cases, it helps ensure 
that the intended benefits are flowing to the intended recipients. If 
the policy were to wait until performance was concluded, the remedies 
would be much more limited.
    Proposed Sec.  125.6(i) addressed how the limitations on 
subcontracting apply to members of a Small Business Teaming Arrangement 
(SBTA) that are exempt from affiliation according to Sec.  
121.103(b)(9). Proposed Sec.  125.6(i) stated that the limitations on 
subcontracting apply to the combined effort of the SBTA members, not to 
the individual members of the SBTA separately. However, SBTAs only 
apply to bundled contracts, and a bundled contract is a contract that 
is not suitable for award to a small business concern. The Small 
Business Act allows small businesses to team together on a bundled 
contract and requires the agency to consider the capabilities of 
subcontractors on the team, and exempt those team members from 
affiliation. 15 U.S.C. 644(e)(4). If a contract contains a reserve, it 
is suitable for award to a small business, and thus the contract is not 
bundled and the SBTA would not apply. Thus, SBA is removing language 
concerning reserves from Sec.  121.109(b)(9) and language concerning 
SBTAs from Sec.  125.6, because the limitations on subcontracting do 
not apply. SBTAs with respect to bundled and consolidation contracts 
are discussed in depth at Sec.  125.2(b)(iii)(G).
    SBA proposed to add new Sec.  125.6(j), which exempted small 
business set-aside contracts valued between $3,500 and $150,000 from 
the limitations on subcontracting requirements. Section 46 of the Small 
Business Act mandates that the statutory performance of work 
requirements (limitations on subcontracting) apply to small business 
set-aside contracts with values above $150,000, and contracts of any 
amount awarded to socioeconomically disadvantaged contracting programs, 
such as 8(a), WOSB/EDWOSB, HUBZone, and SDVO set-aside contracts. 15 
U.S.C. 657s. Although the limitations on subcontracting apply to all of 
these contracts, Section 46 does not specifically cite Section 15(j) of 
the Small Business Act, which is the statutory authority for non-
socioeconomically disadvantaged small business set-asides between 
$3,500 and $150,000. Further, Section 15(j) of the Small Business Act 
does not mention any limitation on subcontracting requirements in 
connection with the performance of set-aside contracts under Section 
15(j). Thus, the FAR provides that ``[t]he contracting officer shall 
insert the clause at 52.219-14, Limitations on Subcontracting, in 
solicitations and contracts for supplies, services, and construction, 
if any portion of the requirement is to be set aside or reserved for 
small business and the contract amount is expected to exceed 
$150,000.'' FAR 19.508(e) (48 CFR 19.508(e)). SBA proposed not to 
expand the application of the limitations on subcontracting to apply to 
small business set-asides below $150,000, but rather to adopt what the 
FAR has done. The limitation on subcontracting requirements would 
continue to apply to all 8(a), HUBZone, SDVO, and WOSB/EDWOSB set-aside 
contract awards regardless of value, including but not limited to 
contracts with values between $3,500 and $150,000. SBA requested 
comments regarding whether the limitations on subcontracting should 
apply to small business set-aside contracts valued between $3,500 and 
$150,000. In addition, SBA requested comments on whether, for policy 
reasons and for purposes of consistency, the performance of work/
subcontracting limitation requirements should apply to a small business 
set-aside contract with a value between $3,500 and $150,000.
    SBA received thirteen comments regarding proposed Sec.  125.6(j). 
Ten of these comments supported SBA's proposed approach to exclude 
procurements with a value between $3,500 and $150,000 from the 
limitations on subcontracting. One commenter opposed this approach and 
stated that eliminating the application of the nonmanufacturer rule 
(NMR) to procurements of this value would open itself up to direct 
competition with non-U.S., other than small manufacturers. Another 
commenter suggested that SBA should exclude all small business program 
set-aside procurements valued between $3,500 and $150,000 from the 
limitations on subcontracting rather than just small business set-aside 
procurements. The remaining comment received was outside the scope of 
this rule-making.
    In response to these comments, SBA notes that the limitations on 
subcontracting rule and the NMR as set forth in the Small Business Act 
do not exclude set-asides under other authorities from those 
requirements based on the value of the contract. 15 U.S.C. 657s. The 
only set-aside authority that is not cited in the limitations on 
subcontracting provision is Section 15(j) of the Small Business Act, 
which is the statutory authority for small business set-asides valued 
between $3,500 and $150,000. SBA is adopting the proposed language of 
Sec.  125.6(j), in redesignated Sec.  125.6(f), as the majority of 
comments supported this approach and it is supported by the Small 
Business Act and consistent with the existing FAR.
    Section 1652 of the NDAA, codified at 15 U.S.C. 645 (Section 16 of 
the Small Business Act), prescribes penalties for concerns that violate 
the limitations on subcontracting requirements. SBA proposed to add new 
Sec.  125.6(k) to incorporate these penalties into the regulations. 
Proposed Sec.  125.6(k) stated that concerns that violate the 
limitations on subcontracting are subject to the penalties listed in 15 
U.S.C. 645(d) except that the fine associated with these penalties will 
be the greater of either $500,000 or the dollar amount spent in excess 
of the permitted levels for subcontracting.
    SBA received twenty-nine comments related to proposed Sec.  
125.6(k). Twenty-eight of these comments requested that SBA alter this 
paragraph to lower the penalties and allow a good faith exception for a 
violation of the limitations on subcontracting. Most of these 
commenters were concerned that by violating the limitations on 
subcontracting by even $1, possibly due to a miscalculation or a change 
in the Service Contract Act wage rates, a prime contractor could be 
exposed to a minimum fine of $500,000. Many commenters requested that 
SBA change the language from imposing a minimum fine of $500,000 to 
imposing a fine that is the lesser of $500,000 or the amount spent in 
excess of the permitted levels. Several commenters requested that the 
fine be imposed on the subcontractor that is not qualified to receive 
the funds, as it is likely that the prime contractor relied in good 
faith on a misrepresentation of the subcontractor's small business or 
small business program participation status. Other commenters requested 
that SBA allow a contractor that has violated the limitations on 
subcontracting to submit a mitigation plan and provide the contracting 
officer with discretion to apply the penalty when appropriate and in an 
amount proportional to the severity of the violation. One commenter 
supported the penalty language as proposed.
    In response to these comments, SBA notes that the language of 
proposed Sec.  125.6(k) mirrors the language of Section 1652 of the 
NDAA. The penalty

[[Page 34250]]

provision is statutory and the use of the $500,000 fine as the minimum 
amount to be applied is also statutory. SBA believes that the penalty 
provision will deter contractors from agreeing to comply with the 
limitations on subcontracting without a practical plan for compliance 
because it provides a strong enforcement mechanism. It is critical that 
firms that obtain set-aside and preferential contracts comply with 
applicable subcontracting limitations. The government's policy of 
promoting contracting opportunities for small and socioeconomically 
disadvantaged businesses is seriously undermined when firms pass on 
work in excess of applicable limitations to firms that are other than 
small or that are not disadvantaged. SBA is adopting the proposed 
language into redesignated Sec.  125.6(h).
    This rule also proposed to revise Sec.  121.103(h)(4). Paragraph 
(h) discusses the circumstances under which SBA will find affiliation 
among joint venturers for size purposes. Paragraph (h)(4) addresses the 
ostensible subcontractor rule, which is the concept that a 
subcontractor who performs the majority of the primary and vital 
requirements of a contract or whom the prime contractor is unusually 
reliant upon may be considered a joint venturer with the prime 
contractor and thus affiliated with the prime contractor for size 
determination purposes. SBA proposed to revise this paragraph to 
exclude subcontractors that are similarly situated subcontractors, as 
that term is defined in 13 CFR 125.1, from affiliation under the 
ostensible subcontractor rule. Such a position clearly flows from the 
NDAA's treatment of similarly situated subcontractors.
    SBA received eleven comments in response to proposed Sec.  
121.103(h)(4). All eleven comments supported the exclusion of similarly 
situated entity subcontractors from the application of the ostensible 
subcontractor rule, as discussed in Sec.  121.103(h)(4). As such, SBA 
is adopting the language in Sec.  121.103(h)(4) as proposed.
    SBA proposed to amend Sec.  124.510(a), (b), and (c) to reflect the 
limitations on subcontracting rules with respect to the 8(a) Business 
Development (BD) program. Part 124 addresses the 8(a) BD program and 
the limitations on subcontracting that apply to procurements set aside 
for competition among 8(a) BD participants. SBA proposed to delete 
paragraphs (a) and (b) and add new paragraph (a). Currently, paragraphs 
(a) and (b) discuss how 8(a) BD participants can comply with the 
performance of work requirements even though these specifications are 
also discussed in Sec.  125.6. To eliminate confusion and repetition, 
SBA proposed to remove current paragraph (b) and add a new paragraph 
(a), which will direct 8(a) BD participants to comply with the 
limitations on subcontracting set forth in Sec.  125.6. The proposed 
rule would redesignate current paragraph (c) as paragraph (b) and 
include references to the limitations on subcontracting as opposed to 
the performance of work requirements in newly redesignated paragraph 
(b). The NDAA uses the term ``limitations on subcontracting'' to 
describe the concept that is currently referred to as ``performance of 
work requirements.'' This change provides consistency throughout the 
rules.
    SBA received seventeen comments in response to the proposed 
language in Sec.  124.510. Ten of these commenters opposed the proposed 
language and specifically disagreed with providing contracting officers 
the discretion to apply the limitations on subcontracting to 8(a) 
contracts per order. Commenters also opposed SBA's proposed Sec.  
124.510(b)(2), which allows the SBA District Director the ability to 
waive the applicable limitations on subcontracting in certain 
circumstances. Three of the comments received were suggestions to 
modify the language of proposed Sec.  124.510(b) to clarify that 
subcontracts awarded to similarly situated entities for an 8(a) 
procurement are not counted toward that 8(a) prime contractor's 
limitations on subcontracting but are counted toward their non-8(a) 
revenue for purposes of meeting their business activity targets. Two 
commenters supported the language of Sec.  124.510(b) as proposed.
    For purposes of counting 8(a) revenue, the dollar amount of a prime 
contract award is credited towards the revenue of the prime contractor. 
Thus, to the extent an 8(a) prime decides to utilize a subcontractor 
for purposes of meeting the limitations on subcontracting provisions, 
any amount subcontracted is not deducted from the prime's 8(a) revenue. 
SBA notes that the language in Sec.  124.510(b) is not new, and as 
such, no changes to this language were proposed. Nonetheless, several 
commenters expressed their opposition to a District Director's ability 
to waive compliance with the limitations on subcontracting in certain 
circumstances and disagreed with the time period used to determine 
compliance with the limitations on subcontracting for 8(a) 
procurements. In response to these comments, SBA is eliminating this 
provision. SBA has not received any comments or input indicating this 
provision has benefited specific 8(a) concerns. In addition, this 
exemption is not based on any statutory authority. Thus, in accordance 
with the intent of the section to make the performance requirements 
uniform across all programs, SBA is eliminating paragraphs (c)(4) and 
(c)(5) of Sec.  124.510.
    SBA proposed to revise Sec.  125.15(a)(3) and (b)(3), which address 
the requirements for an SDVO SBC to submit an offer on a contract. SBA 
proposed to revise paragraph (a)(3) to state that a concern that 
represents itself as an SDVO SBC must also represent that it will 
comply with the limitations on subcontracting, as set forth in Sec.  
125.6, as part of its initial offer, including price. SBA proposed to 
revise paragraph (b)(3) to state that joint ventures that represent 
themselves as an SDVO SBC joint venture must comply with the applicable 
limitations on subcontracting, as set forth in Sec.  125.6. SBA 
received no comments related to these paragraphs and as such is 
adopting the language as proposed.

HUBZone Program

    SBA also proposed to revise Sec.  126.200(b)(6). This paragraph 
addresses the requirements that a concern must meet in order to receive 
SBA's certification as a qualified HUBZone SBC. Paragraphs (b)(6) and 
(d) are repetitive as both address the requirement that HUBZone SBCs 
must comply with the relevant performance of work requirements. SBA 
proposed to delete paragraph (d) and revise paragraph (b)(6). 
Specifically, proposed paragraph (b)(6) would state that the concern 
must represent in its application for the HUBZone program that it will 
comply with the applicable limitations on subcontracting requirements 
with respect to any procurement that it receives as a qualified HUBZone 
SBC. SBA received one comment related to proposed Sec.  126.200(b)(6), 
which was a request to clarify whether a HUBZone similarly situated 
entity subcontractor must meet the 35% residency requirement for 
HUBZone program participation. In response, SBA clarifies that a 
HUBZone similarly situated entity subcontractor must be able to qualify 
for the prime HUBZone procurement in order to be considered a similarly 
situated entity. This means that it must also be HUBZone certified and 
be considered small for the NAICS code assigned to its subcontract. SBA 
is adopting the language in Sec.  126.200(b)(6) as proposed.
    SBA proposed to revise Sec.  126.700 in its entirety, including 
revision of paragraph (a) and removal of paragraphs (b) and (c). This 
section currently

[[Page 34251]]

addresses the performance of work requirements for HUBZone contracts. 
SBA proposed to retitle the section to include the terminology 
``limitations on subcontracting''; remove references to the 
``performance of work'' requirements; and replace the deleted text with 
a reference to 13 CFR 125.6 for guidance on the applicable limitations 
on subcontracting for HUBZone contracts. SBA believes that it would be 
confusing to have each section of SBA's set-aside program regulations 
repeat the relevant limitations on subcontracting, and therefore SBA 
proposed to list all of the limitations on subcontracting requirements 
at Sec.  125.6 and provide references to that section in each of the 
various small business government contracting and business development 
program sections. SBA did not receive comments related to this 
paragraph and is adopting the language as proposed.
    SBA proposed to revise Sec.  127.504(b), which addresses the 
requirements a concern must satisfy to submit an offer for an EDWOSB or 
WOSB requirement. Paragraph (b) states that the concern must meet the 
performance of work requirements in Sec.  125.6. SBA proposed to revise 
this paragraph to replace the reference to ``performance of work 
requirement'' with ``limitations on subcontracting.'' SBA did not 
receive comments related to this paragraph and is adopting the language 
as proposed.
    SBA proposed to revise Sec.  127.506(d), which addresses the 
requirements that a joint venture must satisfy in order to submit an 
offer for an EDWOSB or WOSB requirement. SBA proposed to revise this 
paragraph by replacing the reference to ``performance of work 
requirement'' with ``limitations on subcontracting.'' SBA did not 
receive comments related to this paragraph and is adopting the language 
as proposed.

Subcontracting Plans

    Section 1653 of the NDAA, as codified at 15 U.S.C. 637(d) (Section 
8(d) of the Small Business Act), addresses amendments to the 
requirements for subcontracting plans. Section 1653(a)(2) of the NDAA 
states that the head of the contracting agency shall ensure that the 
agency collects, reports, and reviews data on the extent to which the 
agency's contractors meet the goals and objectives set out in their 
subcontracting plans. SBA proposed to add a new Sec.  125.3(f)(8) to 
incorporate these provisions. SBA received three comments on this 
addition. Two were positive, and the one negative comment felt that the 
statutory language may be too burdensome for contracting officers and 
prime contractors. This final rule adopts the proposed language.
    Section 1653(a)(3) of the NDAA modifies the Small Business Act to 
state that a contractor that fails to provide a written corrective 
action plan after receiving a marginal or unsatisfactory rating for its 
subcontracting plan performance or that fails to make a good faith 
effort to comply with its subcontracting plan will not only be in 
material breach of the contract, but such failure shall also be 
considered in any past performance evaluation of the contractor. SBA 
proposed to revise Sec.  125.3(f)(5) to incorporate this language. SBA 
also proposed adding a new sentence to the end of Sec.  125.3(f)(5), 
which would prescribe the process for a Commercial Market 
Representative (CMR) to report firms that are found to have acted 
fraudulently or in bad faith to the SBA's Area Director for the Office 
of Government Contracting Area Office where the firm is headquartered. 
SBA received eight comments on this proposed change. One of the 
comments wanted SBA to ensure that there was a definitive statement 
that contracting officers shall take into consideration ratings on 
performance of past subcontracting plans when evaluating past 
performance. SBA agrees with this position, but believes that it is 
already clear in the regulatory text. The provisions of the NDAA make 
clear that contracting officers shall take into consideration previous 
performance of its subcontracting plans. The remaining comments were 
generally supportive of the changes. Two negative comments were related 
to requirements of the Act itself which can be modified or changed only 
by another Act passed of Congress. Thus, SBA is not making any changes 
to the proposed rule.
    Section 1653(a)(4) of the NDAA modifies the Small Business Act to 
state that contracting agencies also perform evaluations of a prime 
contractor's subcontracting plan performance, and that SBA's 
evaluations of subcontracting plan performance are completed as a 
supplement to the contracting agency's review. SBA proposed to revise 
Sec.  125.3(f)(1) to incorporate this language. SBA did not receive any 
comments on this change and will be keeping the proposed language.
    Section 1653(a)(5) of the NDAA requires that if an SBC is 
identified as a potential subcontractor in a proposal, offer, bid or 
subcontracting plan in connection with a covered Federal contract, the 
prime contractor shall notify the SBC prior to such identification. 
Section 1653(a)(5) also requires that the Administrator establish a 
reporting mechanism that allows potential subcontractors to report 
fraudulent activity or bad faith behavior by a prime contractor with 
respect to a subcontracting plan. SBA proposed to incorporate these 
requirements in new Sec.  125.3(c)(8) and (9). SBA received eight 
comments on these changes. Several comments asked for clarification on 
how the notification requirements can be met. SBA believes that rule is 
very clear. There are two requirements: First that the notification is 
in writing; and second that it be given to the party in question. 
Ensuring that it is in writing and has been received is the 
responsibility of the contractor. SBA is not making any changes with 
regard to this requirement. Several commenters requested that 
additional requirements be added that would also require notification 
to SBA or another government party that the contract has provided the 
written notification that is required. SBA does not believe that this 
additional step is required by the statute, or that the additional 
burden on contractors is necessary to ensure compliance with the other 
provision.

Affiliation

    SBA proposed to make changes to its regulations in Sec.  
121.103(f), which defines affiliation based on an identity of interest. 
Paragraph 121.103(f) discusses the circumstances where an identity of 
interest between two or more persons leads to affiliation among those 
persons and their interests are aggregated. SBA proposed to add 
additional guidance on how to analyze affiliation due to an identity of 
interest. SBA believed that the additional clarifications will better 
enable concerned parties to understand and determine when they are 
affiliated.
    SBA proposed to divide paragraph (f) into two paragraphs. Paragraph 
(f)(1) will include further clarification regarding the type of 
relationships between individuals that will create a presumption of 
affiliation due to an identity of interest. Specifically, SBA proposed 
to insert language clarifying that a presumption of affiliation exists 
for firms that conduct business with each other and are owned and 
controlled by persons who are married couples, parties to a civil 
union, parents and children, and siblings. SBA proposed that the 
presumption would be a rebuttable presumption. The proposed rule is 
based on size appeal decisions that have been issued interpreting this 
regulation.
    SBA received several comments with respect to identity of interest 
based on family relationships. Four commenters thought that the list of 
family relationships was not exhaustive enough and should include all 
relationships, such as grandparents and

[[Page 34252]]

cousins. These commenters believed that all familial relationships 
should create the presumption, and that other information such as 
estrangement or distance could be used in rebuttal. Two commenters 
agreed that the clarity SBA was providing was helpful and agreed with 
the changes. Two commenters did not believe that affiliation should 
ever be found based on familial relationships.
    As noted in SBA's proposed rule, the enumerated family 
relationships are relationships in which SBA's Office of Hearings and 
Appeals (OHA) has consistently found affiliation in the past. See Size 
Appeal of Knight Networking & Web Design, Inc., SBA No. SIZ-5561 
(2014); Size Appeal of RGB Group, Inc., SBA No. SIZ-5351 (2012); and 
Size Appeal of Jenn-Kans, Inc., SBA No. SIZ-5114 (2010). The rule is 
intended to take this knowledge and precedent and provide it in the 
rule itself in order to make compliance and understanding easier for 
small businesses. SBA believes the proposed rule accurately encompassed 
the precedential history of SBA size decisions and that it will be 
beneficial in providing some clarity to small businesses. Thus, SBA is 
adopting the language in (f)(1) in the final rule.
    In paragraph (f)(2), SBA proposed adopting a presumption of 
affiliation based on economic dependence. Specifically, if a firm 
derives 70% or more of its revenue from another firm over the previous 
fiscal year, SBA will presume that the one firm is economically 
dependent on the other and, therefore, that the two firms are 
affiliated. Currently there is no fixed percentage that SBA applies 
when evaluating this criteria. However, OHA size appeal decisions have 
provided the 70% figure as a guide. SBA believes that providing clarity 
on this issue will be beneficial for firms, and will enable them to 
more easily identify their affiliates. Further, this presumption is 
rebuttable, such as when a firm is new or a start-up and has only 
received a few contracts or subcontracts. Often new firms will not have 
as many partners and clients, and therefore will normally be generating 
more of their revenue from a much smaller number of other companies. 
Over time these firms should diversify and become less dependent on one 
entity.
    SBA received 26 comments on this section. Several commenters 
pointed out that SBA should use a three-year time frame rather than a 
one year time frame because SBA already uses a three-year time frame 
when averaging annual receipts for size purposes. SBA agrees, and has 
adopted a three-year measuring period in the final rule. Several 
commenters were also concerned that this new rule and its 
interpretation could adversely impact ``start-ups'' that have low 
revenues to begin with and fewer contracts. SBA does not want this new 
rule to negatively impact start-ups or any other company that operates 
in a unique industry. That is precisely why this is not a bright line 
rule, but a rebuttable presumption. This rebuttable presumption is 
based on OHA cases, and OHA has in fact rebutted the presumption in 
appropriate circumstances. For instance, OHA has held that the 
mechanical application of the economic dependence rule is erroneous 
when a startup has only been able to secure one or two contracts. Size 
Appeal of Argus & Black, Inc., SBA No. SIZ-5204 (2011). In addition, 
OHA has held that where the receipts from an alleged affiliate are not 
enough to sustain a firm's business operations, and the firm is able to 
look to other financial support from its Alaska Native Corporation 
(ANC) affiliates to remain viable, the fact that the firm received more 
than 70% of its receipts from its alleged affiliate is not sufficient 
to establish affiliation. Size Appeal of Olgoonik Solutions LLC, SBA No 
SIZ-5669 (2015). In response to the comments and in an effort to 
provide greater clarity, this final rule specifies that the presumption 
of affiliation based on economic dependence 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. In 
addition, SBA has provided examples in the regulatory text for 
clarification. Several comments asked for a specific list of acceptable 
rebuttals, and one commenter requested that Tribally-owned firms be 
granted an explicit exception. SBA does not believe that providing a 
list of acceptable rebuttals may have the unintended consequence of 
limiting the types of rebuttals that are acceptable. Instead SBA 
believes that firms should be permitted to make any arguments and 
provide any evidence that they believe demonstrates that no affiliation 
should be found. In addition, SBA has clarified that SBA will not find 
affiliation between two concerns owned by an Indian Tribe, ANC, Native 
Hawaiian Organization (NHO) or Community Development Corporation (CDC) 
based solely on the contractual relations of the two concerns. The 
Small Business Act and SBA's rules clearly recognize that ANC, NHO, 
CDC, and Tribally-owned concerns will provide assistance to sister 
entities, and it does not make sense to find affiliation based on 
economic dependence among such concerns.

Joint Ventures

    SBA proposed to amend Sec.  121.103(h) to broaden the exclusion 
from affiliation for small business size status to allow two or more 
small businesses to joint venture for any procurement without being 
affiliated with regard to the performance of that procurement 
requirement. Currently, in addition to the exclusion from affiliation 
given to an 8(a) prot[eacute]g[eacute] firm that joint ventures with 
its SBA-approved mentor for any small business procurement, there is 
also an exclusion from affiliation between two or more small businesses 
that seek to perform a small business procurement as a joint venture 
where the procurement is bundled or large (i.e., greater than half the 
size standard for a procurement assigned a NAICS code with a receipts-
based size standard and greater than $10 million for a procurement 
assigned a NAICS code with an employee-based size standard). SBA 
proposed to remove the restriction on the type of contract for which 
small businesses may joint venture without being affiliated for size 
determination purposes. SBA proposed this change for several reasons. 
First, the proposed change would encourage more small business joint 
venturing, in furtherance of the government-wide goals for small 
business participation in federal contracting. Second, the proposed 
change is consistent with the results from the Small Business Teaming 
Pilot Program indicating there is a need for more small business 
opportunities and firms have greater success on small contracts than on 
large contracts. Third, this proposed change would better align with 
the new provisions of the NDAA governing the limitations on 
subcontracting, which allow a small business prime contractor to 
subcontract to as many similarly situated subcontractors as desired. If 
a small business prime contractor can subcontract significant portions 
of that contract to one or more other small businesses and, in doing 
so, meet the performance of work requirements for small business 
(without being affiliated with the small business subcontractor(s)), it 
is SBA's view that similar treatment should be afforded joint 
ventures--so that a joint venture of two or more small businesses could 
perform a procurement requirement as a small business when each is 
individually small.
    SBA received 43 comments on this section. The comments were 
overwhelmingly supportive of the change. As such, this final rule 
adopts

[[Page 34253]]

the proposed language requiring only that each member of a joint 
venture individually qualify as small. Several commenters also 
suggested that SBA provide additional guidance regarding joint ventures 
that perform contracts as similarly situated entities. This final rule 
clarifies that a joint venture of two or more business concerns may 
submit an offer as a small business for a Federal procurement, 
subcontract or sale so long as each concern is small under the size 
standard corresponding to the NAICS code assigned to the contract.

Calculation of Annual Receipts

    SBA proposed to amend Sec.  121.104, which explains how SBA 
calculates annual receipts when determining the size of a business 
concern. SBA proposed to clarify that receipts include all income, and 
the only exclusions from income are the ones specifically listed in 
paragraph (a). It was always SBA's intent to include all income, except 
for the listed exclusions; however, SBA has found that some business 
concerns misinterpreted the current definition of receipts to exclude 
passive income. SBA's proposed change clarifies the intent to include 
all income, including passive income, in the calculation of receipts.
    SBA received 15 comments on this section. The majority of the 
comments were supportive. Several commenters believed that SBA should 
not count certain expenses to subcontractors as revenue. The comments 
were asking SBA to consider new exemptions. The proposed change was not 
intended to fundamentally change the meaning of SBA's regulation, but 
merely ensure that small businesses are aware that all income is 
considered including passive income. Thus, SBA is adopting the proposed 
language in this final rule.

Recertification

    SBA proposed to amend Sec.  121.404(g)(2)(ii) by adding new 
paragraph (D) to clarify when recertification of size is required 
following the merger or acquisition of a firm that submitted an offer 
as a small business concern. Paragraph (D) clarifies that if the merger 
or acquisition occurs after offer but prior to award, the offeror must 
recertify its size to the contracting officer prior to award.
    SBA received twenty-one comments on this proposed change. Nine 
commenters supported SBA's proposal. One commenter asked that SBA go 
further and specifically allow contracting officers to refuse novation 
of contacts if an acquisition or merger occurs within 90 days of an 
award. Seven commenters strongly opposed SBA's proposed changes. Two 
commenters argued that there should be a 30 day period prior to award 
requirement. SBA does not know how this could be implemented given that 
offerors do not know when an award announcement will be made. One 
commenter suggested SBA should only require recertification if the 
merger or sale involves a large business. One commenter was confused 
about whether this rule would negate the requirement to certify at the 
time at offer.
    SBA is adopting the proposed language in this final rule. For 
several years SBA's rules have required recertification in connection 
with a contract when there is an acquisition or merger involving the 
prime contractor. SBA never intended for the recertification 
requirement to not apply based on when the acquisition or merger 
occurred. If recertification is required for an existing contract, it 
should be required for a pending contract. An agency's receipt of small 
business credit should not depend on whether an acquisition or merger 
occurs the day before award of contract.

Small Business Innovation Research and Small Business Technology 
Transfer Programs

    SBA proposed to amend Sec.  121.702(a)(2), which addresses an 
ownership and control element of the eligibility requirements for the 
Small Business Innovation and Research (SBIR) Program, to clarify that 
a single venture capital operating company (VCOC), hedge fund, or 
private equity firm may own more than 50% of an SBIR awardee if that 
single VCOC, hedge fund, or private equity firm qualifies as a small 
business concern which is more than 50% directly owned and controlled 
by individuals who are citizens or permanent resident aliens of the 
United States.
    Section 121.702(a) establishes the SBIR program eligibility 
requirements related to ownership and control. Awardees that satisfy 
any of the permissible ownership and control structures discussed in 
Sec.  121.702(a) must also satisfy all of the size and affiliation 
requirements stated in Sec.  121.702(c). Section 121.702(a)(1)(ii) 
allows an SBIR awardee to be majority-owned by multiple VCOCs, hedge 
funds, or private equity firms. Section 121.702(a)(2) prohibits 
ownership by a single VCOC, hedge fund, or private equity firm that 
owns a majority of the concern. This paragraph has been misread because 
it does not account for the scenario where an awardee is majority-owned 
by a single VCOC, hedge fund, or private equity firm that is itself 
another small business concern and therefore qualifies as an allowable 
ownership structure under Sec.  121.702(a)(1)(i). To clarify this 
point, SBA is amending Sec.  121.702(a)(2) to explain that it is 
permissible for an SBIR awardee to be majority owned by a single VCOC, 
hedge fund, or private equity firm if that firm meets the definition of 
a small business concern under this section and is more than 50% 
directly owned and controlled by individuals who are citizens or 
permanent resident aliens of the United States. SBA did not receive any 
comments related to this proposed change and is adopting the change as 
proposed.

Size Protests

    SBA proposed to amend Sec.  121.1001(a), which specifies who may 
initiate a size status protest. Small businesses and contracting 
officers have found the current language to be unclear because it 
contains a double negative, stating that any offeror that has not been 
eliminated for reasons not related to size may file a size protest. The 
intent is to provide standing to any offeror that is in line or 
consideration for award, but to not provide standing for an offeror 
that has been found to be non-responsive, technically unacceptable or 
outside of the competitive range.
    In addition, the proposed rule added a new Sec.  121.1001(b)(11) 
that would authorize the SBA's Director, Office of Government 
Contracting, to initiate a formal size determination in connection with 
eligibility for the SDVO SBC and the WOSB/EDWOSB programs. This change 
is needed to correct an oversight that did not authorize such requests 
for size determinations when those programs were added to SBA's 
regulations.
    SBA received 16 comments on this change. All commenters were 
supportive; however one commenter believed that the protests should be 
allowed for firms outside the competitive range. SBA disagrees. A firm 
outside of the competitive range is not eligible for award and does not 
have standing. However, SBA and the contracting officer may file a size 
protest at any time, so any firm, including those that do not have 
standing, may bring information pertaining to the size of the apparent 
successful offeror to the attention of SBA and/or the contracting 
officer for their consideration.

North American Industry Classification System Code Appeals

    SBA sought comments on the appropriate timeline for filing a NAICS 
code appeal. SBA's regulations

[[Page 34254]]

currently state that, ``[a]n appeal from a contracting officer's NAICS 
code or size standard designation must be served and filed within 10 
calendar days after the issuance of the solicitation or amendment 
affecting the NAICS code or size standard.'' 13 CFR 121.1103(b)(1). SBA 
received 23 comments on this issue. Most of the comments were 
supportive of SBA's current timing. Several commenters recommended 
other changes that SBA could make. Based on the comments, SBA is not 
altering the timeliness rules for NAICS code appeals.

Nonmanufacturer Rule

    SBA proposed to clarify that the limitations on subcontracting and 
the nonmanufacturer rule (NMR) do not apply to small business set-aside 
contracts valued between $3,000 and $150,000. The statutory 
nonmanufacturer rule, which is contained in Section 8(a)(17) of the 
Small Business Act, 15 U.S.C. 637(a)(17), is an exception to the 
limitations on subcontracting (LOS). It provides that a concern may not 
be denied the opportunity to compete for a supply contract under 
Sections 8(a) and 15(a) of the Small Business Act simply because it is 
not the actual manufacturer or processor of the product. Section 
8(a)(17) of the Small Business Act does not, however, also reference 
Section 15(j) of the Small Business Act, the authority requiring small 
business set-aside contracts valued between $3,500 and $150,000. Thus, 
there is no specific statutory requirement that the nonmanufacturer 
rule apply to the mandated small business set-asides between $3,500 and 
$150,000. SBA believes that not applying the nonmanufacturer rule to 
small business set-asides valued between $3,500 and $150,000 will spur 
small business competition by making it more likely that a contracting 
officer will set aside an acquisition for small business concerns 
because the agency will not have to request a waiver from SBA where 
there are no small business manufacturers available. In order to 
request a waiver, an agency must provide SBA with the solicitation and 
market research on whether manufacturers exist and wait several weeks 
for SBA to verify the data and grant the waiver. Without a waiver, an 
offeror on a small business set-aside supply contract must either 
manufacture at least 50% of the product on its own or supply the 
product of a small business made in the United States. Many waiver 
requests below $150,000 are for name brand items (e.g., computers) that 
are clearly not made by small businesses in the United States. Whether 
an agency can procure name brand items is not within the jurisdiction 
of SBA. The contracting officer must make that determination, which can 
be protested by interested parties.
    SBA received 28 comments on this issue, of which 19 were 
supportive. The non-supportive comments believed that this change would 
drastically hurt small business manufacturers because most of their 
contracts fell within the exemption range. One commenter maintained 
that the proposed rule would hurt resellers by increasing competition 
among resellers. Given the support for the change and the consistency 
between the FAR and SBA's regulations that this creates, SBA is 
adopting the proposed language in the final rule.
    Several commenters asked for additional clarity on several discrete 
issues. Specifically, commenters sought guidance on how the NMR applies 
to multiple item procurements generally, and especially to procurements 
with multiple NAICS codes, and how the NMR and LOS apply when a 
multiple-item procurement contains items manufactured by multiple large 
and small businesses.
    Further, commenters requested guidance on the treatment of rentals 
with regard to the NMR and LOS. In order to provide more clarity SBA is 
proposing new language in Sec.  121.406(b)(4) and (e). SBA has also 
provided several additional examples to demonstrate how the rules 
should be applied. The final rule clarifies that rental services are 
not supplies. SBA bases this clarification on the NAICS code and NAICS 
manual, as well as the FAR and other government contracting statutes 
which indicate that renting an item is not the same thing as buying an 
item. SBA is also adding additional language to clarify how to apply 
the NMR, LOS, and size standards, to address comments concerning how to 
apply the various rules when the government acquires more than one item 
in a single procurement. SBA believes this language will more clearly 
state how the various regulations interact in that situation.
    The intent is for the NMR, LOS, and size standards to operate in 
conjunction with each other in a manner consistent with all of SBA's 
regulations. Therefore SBA believes that the proper way to calculate 
LOS requirements with regard to a contract that contains waived 
item(s)/small business item(s) is that the value of the waived item(s) 
are subtracted from the total and the prime contractor is responsible 
for meeting the requirements on the remainder. SBA has added several 
examples to Sec.  125.6(a) to help explain how this should be 
calculated in practice.
    SBA proposed to amend Sec.  121.1203 to require that contracting 
officers notify potential offerors of any waivers, whether class 
waivers or contract specific waivers, that will be applied to the 
procurement. SBA proposed that this notification of the application of 
a waiver be contained in the solicitation itself. Without notification 
that a waiver is being applied by the contracting officer, potential 
offerors cannot reasonably anticipate what if any requirements they 
must meet in order to perform the procurement in accordance with SBA's 
regulations. SBA believed that providing notice of waivers in the 
solicitation will provide all potential offerors with the information 
needed to decide if they should submit an offer.
    SBA also proposed to amend Sec.  121.1203, regarding waivers to the 
nonmanufacturer rule. SBA proposed to amend Sec.  121.1203(a) to 
specifically authorize SBA to grant a waiver to the nonmanufacturer 
rule for an individual contract award after a solicitation has been 
issued, provided the contracting officer agrees to provide all 
potential offerors additional time to respond. SBA believes that a 
waiver may be appropriate even after a solicitation has been issued, 
but wants to ensure that all potential offerors would be fully apprised 
of any waiver granted after the solicitation is issued and have a 
reasonable amount of time (depending upon the complexities of the 
procurement) to adjust their offers accordingly.
    SBA proposed in Sec.  121.1203(b) to allow some waivers to be 
granted after the contract has been awarded. SBA believed that granting 
post-award waivers, when additional items that are eligible for a 
waiver are sought through in-scope modifications, is reasonable and 
will increase the use of the waiver process and allow firms to compete 
for contracts in a manner consistent with SBA regulations. SBA 
envisioned these types of post-award waivers to be given in situations 
similar to the example contained in the proposed regulation--where a 
need for an item occurs after contract award, where requiring the item 
would be an in-scope modification, and where the item is one for which 
a waiver would have been granted if sought prior to contract award.
    SBA received 32 comments on the changes being made to NMR waivers. 
Many commenters supported the proposed language regarding notification 
by the contracting officer. Commenters universally agreed that being 
informed of the application of a

[[Page 34255]]

waiver as early as possible would be beneficial to small business 
contractors. Several comments requested additional guidance or a firmer 
statement about the application of waivers granted on base contract to 
orders issued against that contract. Contract specific waivers are 
granted for individual items and the waiver is good for the entirety of 
that contract with regard to the item that was waived. Therefore, the 
waiver would by necessity also include all orders for supplies under 
that contract that would require the item(s) that had been waived.,
    SBA proposed to add a new Sec.  121.1203(d), dealing with waivers 
to the nonmanufacturer rule for the purchase of software. SBA proposed 
to address whether the nonmanufacturer rule should apply to certain 
software that can readily be treated as an item and not a service. SBA 
proposed to treat this type of software as a product or item of supply 
rather than a service. SBA believed that this change will bring SBA's 
regulations in line with how most buyers already perceive these types 
of software. Readily available software that is generally available to 
both the public and private sector unmodified is almost universally 
perceived to be a supply item, even though SBA's regulations currently 
would treat the production of any type of software as a service. SBA 
proposed to allow for certain types of software to be eligible for 
waivers of the nonmanufacturer rule. SBA proposed to grant waivers on 
software that meet criteria that establishes that the Government is 
buying something that is more like a product or supply item than a 
service. Clearly, when the Government seeks to award a contract to a 
business concern to create, design, customize or modify custom 
software, that should be classified as a service requirement and the 
activity will remain classified in a service NAICS code to which the 
nonmanufacturer rule does not apply. For a service procurement set 
aside for small business, the prime (together with one or more 
similarly situated subcontractors) would have to perform the required 
percentage of work. On the other hand, when the government buys certain 
types of unmodified software that is generally available to both the 
public and the government from a business concern, SBA believes that 
the contracting officer should classify the requirement as a commodity 
or supply. If the procurement is a supply contract set aside for small 
business, the prime contractor, together with any similarly situated 
subcontractors, would have to perform at least 50% of the cost of 
manufacturing the software, unless SBA granted a waiver of the 
nonmanufacturer rule.
    Commenters generally supported SBA's proposed language. One 
commenter stated that given this new approach by SBA, that some 
software products should be granted class waivers. Once this rule is 
effective, the public will be able to request a class waiver for a 
software item under SBA's existing regulations for class waivers. 13 
CFR 121.1204. Many commenters requested drastic changes to SBA's 
current waiver procedures. Specifically, the commenters requested that 
a waiver requested by CO be assumed granted if SBA does not respond in 
specified period of time. Two commenters requested language that would 
allow bidders to assume pending waiver requests are granted when they 
submit offers. SBA cannot adopt these recommendations. The Small 
Business Act is clear that only SBA may grant a waiver of the NMR. 
These comments reinforce SBA's belief that the current situation has 
caused too much confusion for small contractors, and SBA is adopting 
the proposed language in this final rule, which requires the 
contracting officer to request a contract specific waiver prior to 
issuing the solicitation, and provide notification of the application 
of the waiver in the solicitation itself.
    One commenter complained that the application of the software 
waiver is not also being applied to cloud based solutions. It is SBA's 
current position that cloud based solutions are services that are being 
provided to the government and not supplies that the government is 
purchasing, and therefore the NMR is not applicable. In our view, cloud 
based solutions are similar to rentals, which, as discussed above, SBA 
treats as services. Several commenters asked SBA to address the issue 
of NMR waiver requests when the issue is contractor requesting a brand 
name item. The decision to request a brand name item is in the 
discretion of the contracting officer. However, the Small Business Act 
does not exclude brand name item acquisitions from the statutory NMR 
waiver requirements.
    In the proposed rule, SBA proposed to amend Sec.  121.201 by adding 
a footnote to NAICS code 511210, Software Publishers, explaining that 
this is the proper NAICS code to use when the government is purchasing 
software that is eligible for a waiver of the NMR. The 2012 NAICs 
manual provides the following definition of this industry:

    This industry comprises establishments primarily engaged in 
computer software publishing or publishing and reproduction. 
Establishments in this industry carry out operations necessary for 
producing and distributing computer software, such as designing, 
providing documentation, assisting in installation, and providing 
support services to software purchasers. These establishments may 
design, develop, and publish, or publish only.

    SBA believes that this accurately reflects the type of companies 
that would be producing and supplying the government with the type of 
software eligible for a waiver. Further, SBA proposed that the 
procurement of this type of software would be treated by SBA as a 
supply requirement, and therefore the NMR would apply, as long as the 
acquisition meets all of the requirements of the rule. SBA reiterates 
that the custom design or modification of software for the government 
will generally continue to be treated as a service. Therefore, if the 
software being acquired requires any custom modifications in order to 
meet the needs of the government, it is not eligible for a waiver of 
the NMR because the contractor is performing a service, not providing a 
supply.
    SBA proposed to amend Sec.  121.406(b)(5) to make a technical 
correction. Section 121.406(b) addresses how a nonmanufacturer may 
qualify as a small business concern for a requirement to provide a 
manufactured product or other supply item. Currently, paragraph (b)(5) 
states that the SBA's Administrator or designee may waive the 
requirement set forth in paragraph (b)(1)(iii) of this section, that 
requires nonmanufacturers to supply the end item of a small business 
manufacturer, processor or producer made in the United States. The 
citation to paragraph (b)(1)(iii) is incorrect and as such, SBA 
proposed to amend this paragraph to include the correct citation, 
paragraph (b)(1)(iv). SBA also proposed to make this correction in the 
size standard proposed rule for industries with employee based size 
standards that are not part of manufacturing, wholesale trade or retail 
trade. 79 FR 53646 (Sept. 10, 2014). The size standard rule was 
finalized on January 26, 2016 (81 FR 4436), and SBA has removed the 
proposed amendment from this final rule.
    In addition, in the proposed rule SBA proposed to amend Sec.  
121.406(b)(7) to clarify that SBA's waiver of the NMR has no effect on 
requirements external to the Small Business Act which involve domestic 
sources of supply, such as the Buy American Act and the Trade 
Agreements Act.
    In order to clarify whether the NMR applies, or whether a general 
or specific waiver is attached to a procurement, SBA proposed to add a 
new Sec.  121.1206

[[Page 34256]]

to require contracting officers to receive specific waivers prior to 
posting a solicitation, and also to provide notification to all 
potential offerors of any waivers that will be applied (whether class 
or specific) to a given solicitation. As noted above, commenters were 
generally in favor of this provision, and SBA is adopting the proposed 
language in the final rule.

Adverse Impact and Construction Requirements

    SBA proposed to amend Sec.  124.504 to clarify when a procurement 
for construction services is considered a new requirement. This section 
generally addresses when SBA must conduct an adverse impact analysis 
for the award of an 8(a) contract. SBA is not required to perform an 
adverse impact analysis for new requirements. Currently, paragraph 
(c)(1)(ii)(B) states that ``Construction contracts, by their very 
nature (e.g., the building of a specific structure), are deemed new 
requirements.'' SBA proposed to clarify the definition of ``new 
requirement'' for construction contracts by specifying that generally, 
the building of a specific structure is considered a new requirement. 
However, recurring indefinite delivery or indefinite quantity (IDIQ) 
procurements for construction services are not considered new. SBA has 
found that agencies have misinterpreted the current language of Sec.  
124.504(c)(1)(ii)(B) to consider recurring IDIQ construction services 
procurements as new. SBA intended to clarify that such recurring 
requirements are not considered new. A determination of whether a 
construction contract is recurring or new will have to be made on a 
case by case basis, and there is a process in place that allows SBA to 
file an appeal with the procuring agency when there is a disagreement.
    SBA received 11 comments on this proposed change, and most were 
supportive. The non-supportive comments seemed to have misunderstood 
how the rule will be implemented. There is no presumption that IDIQ 
task or delivery order contracts are not new. The rule is neutral and 
the determination will be made on a case-by-case basis, subject to 
SBA's statutory authority to appeal. Thus, SBA is adopting the proposed 
language in the final rule.

Certificate of Competency

    SBA proposed to amend Sec.  125.5(f), which addresses SBA's review 
of an application for the Certificate of Competency (COC) program. SBA 
proposed to insert new Sec.  125.5(f)(3) to address how SBA should 
review an application for a COC based on a finding of non-
responsibility due to financial capacity where the applicant is the 
apparent successful offeror for an IDIQ task order or contract. SBA 
frequently receives inquiries regarding the application of the COC 
process for financial capacity to the potential award of an IDIQ 
contract. SBA intended to clarify this process by proposing changes to 
Sec.  125.5(f). The proposed changes provided that the SBA's Area 
Director will consider the firm's maximum financial capacity and if 
such COC is issued, it will be for a specific amount that serves as the 
limit of the firm's financial capacity for that contract. The 
contracting officer cannot deny the firm the award of an order or 
contract on the basis of financial incapacity if the firm has not 
reached the financial maximum identified by the Area Director.
    SBA received two comments on this issue. One was supportive, and 
one thought it added too much of a burden to small businesses. SBA 
believes this rule will address certain issues that arise for IDIQ 
contracts. This rule provides clarity to the process and ensures that 
small business participation is maximized. Further, the COC process is 
statutory and provides SBA with the ability to review non-
responsibility determinations concerning small businesses. Thus, SBA is 
adopting the proposed language in the final rule.
    SBA is also revising 13 CFR 121.408(a), which provides the size 
procedures for the COC program. The revision is a technical correction. 
This paragraph currently references 13 CFR 121.1009 to explain how SBA 
would initiate a formal size determination; however, Sec.  121.1009 
relates to the process SBA uses to make a formal size determination. 
The correct regulatory reference is to 13 CFR 121.1001(b)(3)(ii), which 
explains how SBA initiates a formal size determination for the COC 
program.
    SBA is also revising 13 CFR 121.409, to remove the second sentence. 
This section addresses the size standard that applies in an 
unrestricted or full and open procurement. The second sentence states 
that in an unrestricted procurement, the small business concern must 
supply a domestically furnished product. That may or may not be true, 
depending on whether or how the Buy American Act or the Trade 
Agreements Act apply to the procurement. The Small Business Act does 
not impose such a requirement on full and open or unrestricted 
procurements.

Compliance With Executive Orders 12866, 13563, 13175, 12988, 13132, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612) Executive Order 12866

    The Office of Management and Budget (OMB) has determined that this 
final rule is a ``significant'' regulatory action for purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. However, this is not a major rule under the 
Congressional Review Act, 5 U.S.C. 801, et seq.

Regulatory Impact Analysis

1. Is there a need for the regulatory action?

    The final rule implements Sections 1621, 1623, 1651, 1652, 1653 and 
1654 of the National Defense Authorization Act of 2013, Public Law 112-
239, 126 Stat. 1632, January 2, 2013; 15 U.S.C. 637(d), 644(l), 645, 
657s. In addition, it makes several other changes needed to clarify 
ambiguities in or remedy perceived problems with the current 
regulations. These changes should make SBA's regulations easier to use 
and understand.

2. What are the potential benefits and costs of this regulatory action?

    These final regulations should benefit small business concerns by 
allowing small business concerns to use similarly situated 
subcontractors in the performance of a set-aside contract, thereby 
expanding the capacity of the small business prime contractor and 
potentially enabling the firm to compete for and obtain larger 
contracts. It also strengthens the small business subcontracting 
provisions, which may result in more subcontract awards to small 
business concerns. The final rule also seeks to address or clarify 
issues that are ambiguous or subject to dispute, thereby providing 
clarity to contracting officers as well as small business concerns. SBA 
does not believe that this rule will impose new costs on small business 
concerns.

3. What are the alternatives to this final rule?

    Many provisions in this final rule are required to implement 
statutory provisions, thus there are no alternatives for these 
regulations. SBA did consider various options in the proposed rule, 
including a requirement that small business concerns that want to team 
with similarly situated entities enter into a written agreement, 
certify that they will comply and report on compliance. However, in 
response to

[[Page 34257]]

the public comments discussed in the Supplementary Information, SBA is 
not requiring a written agreement or compliance reporting in this rule. 
Contracting officers in their discretion may require compliance 
reporting. Further, firms agree to comply with the limitations on 
subcontracting when they submit an offer. Thus, an additional 
certification is unnecessary. SBA also considered whether it should not 
waive the NMR for the purchase of software. However, this would inhibit 
the ability of agencies to set aside contracts for commodity software 
for small business concerns.

Executive Order 13563

    This executive order directs agencies to, among other things: (a) 
afford the public a meaningful opportunity to comment through the 
Internet on proposed regulations, with a comment period that should 
generally consist of not less than 60 days; (b) provide for an ``open 
exchange'' of information among government officials, experts, 
stakeholders, and the public; and (c) seek the views of those who are 
likely to be affected by the rulemaking, even before issuing a notice 
of proposed rulemaking. As far as practicable or relevant, SBA 
considered these requirements in developing this rule, as discussed 
below.
    1. Did the agency use the best available techniques to quantify 
anticipated present and future costs when responding to Executive Order 
12866 (e.g., identifying changing future compliance costs that might 
result from technological innovation or anticipated behavioral 
changes)?
    To the extent possible, the agency utilized the most recent data 
available in the Federal Procurement Data System--Next Generation, 
System for Award Management and Electronic Subcontracting Reporting 
System.
    2. Public participation: Did the agency: (a) Afford the public a 
meaningful opportunity to comment through the Internet on any proposed 
regulation, with a comment period that should generally consist of not 
less than 60 days; (b) provide for an ``open exchange'' of information 
among government officials, experts, stakeholders, and the public; (c) 
provide timely online access to the rulemaking docket on 
Regulations.gov; and (d) seek the views of those who are likely to be 
affected by rulemaking, even before issuing a notice of proposed 
rulemaking?
    The proposed rule had a 60-day comment period and was posted on 
www.regulations.gov to allow the public to comment meaningfully on its 
provisions. In addition, the agency extended the comment period in 
response to public requests to do so. SBA then submitted the final rule 
to the Office of Management and Budget for interagency review. Further, 
as discussed in the Supplementary Information, SBA conducted tribal 
consultations where these rules were discussed.
    3. Flexibility: Did the agency identify and consider regulatory 
approaches that reduce burdens and maintain flexibility and freedom of 
choice for the public?
    Yes, the final rule implements statutory provisions and will 
provide clarification to rules that were requested by agencies and 
stakeholders. On many occasions, SBA made changes to language or 
provided additional examples, in response to public comment. The final 
rule will make it easier for small businesses to contract with the 
Federal government.

Executive Order 12988

    This action meets applicable standards set forth set forth in 
section 3(a) and 3(b)(2) of Executive Order 12988, Civil Justice 
Reform, to minimize litigation, eliminate ambiguity, and reduce burden. 
This action does not have any retroactive or preemptive effect.

Executive Order 13132

    SBA has determined that this final rule will not have substantial 
direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Therefore, for 
the purposes of Executive Order 13132, SBA has determined that this 
rule has no federalism implications warranting preparation of a 
federalism assessment.

Paperwork Reduction Act, 44 U.S.C. Ch. 35

    For the purposes of the Paperwork Reduction Act, SBA has determined 
that this rule would not impose new government-wide reporting 
requirements on small business concerns.

Regulatory Flexibility Act, 5 U.S.C. 601-612

    According to the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, 
when an agency issues a rulemaking, it must prepare a regulatory 
flexibility analysis to address the impact of the rule on small 
entities. However, section 605 of the RFA allows an agency to certify a 
rule, in lieu of preparing an analysis, if the rulemaking is not 
expected to have a significant economic impact on a substantial number 
of small entities. The RFA defines ``small entity'' to include ``small 
businesses,'' ``small organizations,'' and ``small governmental 
jurisdictions.'' This final rule concerns various aspects of SBA's 
contracting programs, as such the rule relates to small business 
concerns but would not affect ``small organizations'' or ``small 
governmental jurisdictions'' because those programs generally apply 
only to ``business concerns'' as defined by SBA's regulations, in other 
words, to small businesses organized for profit. ``Small 
organizations'' or ``small governmental jurisdictions'' are non-profits 
or governmental entities and do not generally qualify as ``business 
concerns'' within the meaning of SBA's regulations.
    There are approximately 300,000 concerns listed as small business 
concerns in the System for Award Management (SAM) in at least one 
industry category that could potentially be impacted by the 
implementation of the NDAA 2013 contracting provisions. However, we 
cannot say with any certainty how many will be impacted because we do 
not know how many of these concerns will team together to submit 
offers, nor do we know how many will be awarded contracts as teams. The 
number of firms participating in teaming will be lower than the number 
of firms registered in SAM. However, as discussed elsewhere in this 
rule, including section 2 of the Regulatory Impact Analysis, the final 
rule does not impose significant new compliance or other costs on small 
business concerns. Under current law, firms must adhere to certain 
performance requirements when performing set-aside contracts. SBA 
expects that costs now incurred by small business concerns as a result 
of ambiguous or indefinite regulations will be eliminated or reduced. 
Clarifying the confusion and uncertainty concerning the applicability 
of SBA's contracting regulations would also reduce the time burden on 
the small business contracting community and therefore make it easier 
for them to contract with the Federal Government. In sum, the final 
rule would not have a disparate impact on small businesses and would 
increase their opportunities to participate in Federal Government 
contracting without imposing any additional costs. For the reasons 
discussed, SBA certifies that this final rule would not have a 
significant economic impact on a substantial number of small business 
concerns.

[[Page 34258]]

List of Subjects

13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Small businesses.

13 CFR Part 124

    Administrative practice and procedure, Government procurement, 
Hawaiian Natives, Indians--business and finance, Minority businesses, 
Reporting and recordkeeping requirements, Technical assistance.

13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, Technical assistance, 
Veterans.

13 CFR Part 126

    Administrative practice and procedure, Government procurement, 
Penalties, Reporting and Recordkeeping requirements, Small businesses.

13 CFR Part 127

    Government contracts, Reporting and recordkeeping requirements, 
Small businesses.
    Accordingly, for the reasons stated in the preamble, SBA amends 13 
CFR parts 121, 124, 125, 126, and 127 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

0
1. The authority citation for 13 CFR part 121 continues to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 662, and 694a(9).


0
2. Amend Sec.  121.103 by
0
a. Revising paragraph (b)(9);
0
b. Adding paragraphs (f)(1) and (2);
0
c. Adding a new final sentence to paragraph (h) introductory text; and
0
d. Revising paragraphs (h)(3)(i) and (h)(4) to read as follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (b) * * *
    (9) In the case of a solicitation for a bundled contract, a small 
business contractor may enter into a Small Business Teaming Arrangement 
with one or more small business subcontractors and submit an offer as a 
small business without regard to affiliation, so long as each team 
member is small for the size standard assigned to the contract or 
subcontract. The agency shall evaluate the offer in the same manner as 
other offers with due consideration of the capabilities of the 
subcontractors.
* * * * *
    (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.

    Example 1 to paragraph (f). Firm A has been in business for 9 
months and has two contracts. Contract 1 is with Firm B and is 
valued at $900,000 and Contract 2 is with Firm C and is valued at 
$200,000. Thus, Firm B accounts for over 70% of Firm A's receipts. 
Absent other connections between A and B, the presumption of 
affiliation between A and B is rebutted because A is a new firm.
    Example 2 to paragraph (f). Firm A has been in business for five 
years. It has over 200 contracts. Of that 200, 195 are with Firm B, 
and the value of those contracts is greater than 70% of the revenue 
over the previous three years. In this case, SBA would most likely 
find the two firms affiliated unless the firm could provide some 
other compelling rebuttal to the very strong presumption that it 
should be considered affiliated with Firm B.
* * * * *
    (h) * * * For purposes of this section, contract refers to prime 
contracts, and any subcontract in which the joint venture is treated as 
a similarly situated entity as the term is defined in part 125 of this 
chapter.
    * * *
    (3) Exception to affiliation for certain joint ventures. (i) A 
joint venture of two or more business concerns may submit an offer as a 
small business for a Federal procurement, subcontract or sale so long 
as each concern is small under the size standard corresponding to the 
NAICS code assigned to the contract.
* * * * *
    (4) A contractor and its ostensible subcontractor are treated as 
joint venturers, and therefore affiliates, for size determination 
purposes. An ostensible subcontractor is a subcontractor that is not a 
similarly situated entity, as that term is defined in Sec.  125.1 of 
this chapter, and performs primary and vital requirements of a 
contract, or of an order, or is a subcontractor upon which the prime 
contractor is unusually reliant. All aspects of the relationship 
between the prime and subcontractor are considered, including, but not 
limited to, the terms of the proposal (such as contract management, 
technical responsibilities, and the percentage of subcontracted work), 
agreements between the prime and subcontractor (such as bonding 
assistance or the teaming agreement), and whether the subcontractor is 
the incumbent contractor and is ineligible to submit a proposal because 
it exceeds the applicable size standard for that solicitation.
* * * * *

0
3. Amend Sec.  121.104 by revising the introductory text in paragraph 
(a) to read as follows:


Sec.  121.104  How does SBA calculate annual receipts?

    (a) Receipts means all revenue in whatever form received or accrued 
from whatever source, including from the sales of products or services, 
interest, dividends, rents, royalties, fees, or commissions, reduced by 
returns and allowances. Generally, receipts are considered ``total 
income'' (or in the case of a sole proprietorship ``gross income'') 
plus ``cost of goods sold'' as these terms are defined and reported on 
Internal Revenue Service (IRS) tax return forms (such as Form 1120 for 
corporations; Form 1120S and Schedule K for S corporations; Form 1120, 
Form 1065 or Form 1040 for LLCs; Form 1065 and Schedule K for 
partnerships; Form 1040, Schedule F for farms; Form 1040, Schedule C 
for other sole proprietorships). Receipts do not include net capital 
gains or losses; taxes collected for and remitted to a taxing authority 
if included in gross or total income, such as sales or other taxes 
collected from customers and excluding taxes levied on the concern or 
its

[[Page 34259]]

employees; proceeds from transactions between a concern and its 
domestic or foreign affiliates; and amounts collected for another by a 
travel agent, real estate agent, advertising agent, conference 
management service provider, freight forwarder or customs broker. For 
size determination purposes, the only exclusions from receipts are 
those specifically provided for in this paragraph. All other items, 
such as subcontractor costs, reimbursements for purchases a contractor 
makes at a customer's request, investment income, and employee-based 
costs such as payroll taxes, may not be excluded from receipts.
* * * * *

0
4. Amend Sec.  121.201 by adding footnote 20 to read as follows:


Sec.  121.201  What size standards has SBA identified by North American 
Industry Classification System codes?

* * * * *
    Footnotes
* * * * *
    20. NAICS code 511210--For purposes of Government procurement, the 
purchase of software subject to potential waiver of the nonmanufacturer 
rule pursuant to Sec.  121.1203(d) should be classified under this 
NAICS code.


Sec.  121.402  [Amended]

0
5. Amend Sec.  121.402(d) by removing the term ``paragraph (d)'' and 
adding in its place ``paragraph (e)''.
0
6. Amend Sec.  121.404 as follows:
0
a. Revise paragraph (f);
0
b. Revise first sentence of paragraph (g)(2)(i); and
0
c. Add paragraph (g)(2)(ii)(D) to read as follows:


Sec.  121.404  When is the size status of a business concern 
determined?

* * * * *
    (f) For purposes of architect-engineering, design/build or two-step 
sealed bidding procurements, a concern must qualify as small as of the 
date that it certifies that it is small as part of its initial bid or 
proposal (which may or may not include price).
    (g) * * *
    (2)(i) In the case of a merger, sale, or acquisition, where 
contract novation is not required, the contractor must, within 30 days 
of the transaction becoming final, recertify its small business size 
status to the procuring agency, or inform the procuring agency that it 
is other than small. * * *
    (ii) * * *
    (D) If the merger, sale or acquisition occurs after offer but prior 
to award, the offeror must recertify its size to the contracting 
officer prior to award.
* * * * *

0
7. Amend Sec.  121.406 as follows:
0
a. Revise the section heading;
0
b. Revise paragraph (a) introductory text;
0
c. Add a sentence to the end of paragraph (b)(4);
0
d. Revise paragraphs (b)(7) and (d); and
0
e. Redesignate paragraph (e) as paragraph (f) and add new paragraph (e) 
to read as follows:


Sec.  121.406  How does a small business concern qualify to provide 
manufactured products or other supply items under a small business set-
aside, service-disabled veteran-owned small business, HUBZone, WOSB or 
EDWOSB, or 8(a) contract?

    (a) General. In order to qualify as a small business concern for a 
small business set-aside, service-disabled veteran-owned small business 
set-aside or source contract, HUBZone set-aside or sole source 
contract, WOSB or EDWOSB set-aside or sole source contract, 8(a) set-
aside or sole source contract, partial set-aside, or set aside of an 
order against a multiple award contract to provided manufactured 
products or other supply items, an offeror must either:
* * * * *
    (b) * * *
    (4) * * * The rental of an item(s) is a service and should be 
treated as such in the application of the nonmanufacturer rule and the 
limitation on subcontracting.
* * * * *
    (7) SBA's waiver of the nonmanufacturer rule means that the firm 
can supply the product of any size business without regard to the place 
of manufacture. However, SBA's waiver of the nonmanufacturer rule has 
no effect on requirements external to the Small Business Act which 
involve domestic sources of supply, such as the Buy American Act or the 
Trade Agreements Act.
* * * * *
    (d) The performance requirements (limitations on subcontracting) 
and the nonmanufacturer rule do not apply to small business set-aside 
acquisitions with an estimated value between $3,500 and $150,000.
    (e) Multiple item acquisitions. (1) If at least 50% of the 
estimated contract value is composed of items that are manufactured by 
small business concerns, then a waiver of the nonmanufacturer rule is 
not required. There is no requirement that each and every item acquired 
in a multiple-item procurement be manufactured by a small business.
    (2) If more than 50% of the estimated contract value is composed of 
items manufactured by other than small concerns, then a waiver is 
required. SBA may grant a contract specific waiver for one or more 
items in order to ensure that at least 50% of the value of the products 
to be supplied by the nonmanufacturer comes from domestic small 
business manufacturers or are subject to a waiver.
    (3) If a small business is both a manufacturer of item(s) and a 
nonmanufacturer of other item(s), the manufacturer size standard should 
be applied.
* * * * *

0
8. Amend Sec.  121.408 by revising paragraph (a) to read as follows:


Sec.  121.408  What are the size procedures for SBA's Certificate of 
Competency Program?

    (a) A firm which applies for a COC must file an ``Application for 
Small Business Size Determination'' (SBA Form 355). If the initial 
review of SBA Form 355 indicates the applicant, including its 
affiliates, is small for purposes of the COC program, SBA will process 
the application for COC. If the review indicates the applicant, 
including its affiliates is other than small SBA will initiate a formal 
size determination as set forth in Sec.  121.1001(b)(3)(ii). In such a 
case, SBA will not further process the COC application until a formal 
size determination is made.
* * * * *


Sec.  121.409  [Amended]

0
9. Amend Sec.  121.409 by removing the second sentence.

0
10. Amend Sec.  121.702 by revising paragraph (a)(2) to read as 
follows:


Sec.  121.702  What size and eligibility standards are applicable to 
the SBIR and STTR programs?

* * * * *
    (a) * * *
    (2) No single venture capital operating company, hedge fund, or 
private equity firm may own more than 50% of the concern unless that 
single venture capital operating company, hedge fund, or private equity 
firm qualifies as a small business concern that is more than 50% 
directly owned and controlled by individuals who are citizens or 
permanent resident aliens of the United States.
* * * * *

0
11. Amend Sec.  121.1001 as follows:
0
a. Revise paragraphs (a)(1)(i) and (a)(2)(i); and

[[Page 34260]]

0
b. Redesignate paragraph (b)(11) as paragraph (b)(12) and add a new 
paragraph (b)(11).


Sec.  121.1001  Who may initiate a size protest or request a formal 
size determination?

    (a) * * * (1) * * *
    (i) Any offeror that the contracting officer has not eliminated 
from consideration for any procurement-related reason, such as non-
responsiveness, technical unacceptability or outside of the competitive 
range;
* * * * *
    (2) * * *
    (i) Any offeror that the contracting officer has not eliminated 
from consideration for any procurement related reason, such as non-
responsiveness, technical unacceptability or outside of the competitive 
range;
* * * * *
    (b) * * *
    (11) In connection with eligibility for the SDVO SBC and the WOSB/
EDWSOB programs, the Director, Office of Government Contracting, may 
initiate a formal size determination.
* * * * *

0
12. Revise Sec.  121.1203 to read as follows:


Sec.  121.1203  When will a waiver of the Nonmanufacturer Rule be 
granted for an individual contract?

    (a) Where appropriate, SBA will generally grant waivers for an 
individual contract or order prior to the issuance of a solicitation, 
or, where a solicitation has been issued, when the contracting officer 
provides all potential offerors additional time to respond.
    (b) SBA may grant a waiver after contract award, where the 
contracting officer has determined that the modification is within the 
scope of the contract and the agency followed the regulations prior to 
issuance of the solicitation and properly and timely requested a waiver 
for any other items under the contract, where required.

    Example to paragraph (b):  The Government seeks to buy spare 
parts to fix Item A. After conducting market research, the 
government determines that Items B, C, and D that are being procured 
may be eligible for waivers and requests and receives waivers from 
SBA for those items prior to issuing the solicitation. After the 
contract is awarded, the Government determines that it will need 
additional spare parts to fix Item A. The Government determines that 
adding the additional parts as a modification to the original 
contract is within scope. The contracting officer believes that one 
of the additional parts is also eligible for a waiver from SBA, and 
requests the waiver at the time of the modification. If all other 
criteria are met, SBA would grant the waiver, even though the 
contract has already been awarded.

    (c) An individual waiver for an item in a solicitation will be 
approved when the SBA Director, Office of Government Contracting, 
reviews and accepts a contracting officer's determination that no small 
business manufacturer or processor can reasonably be expected to offer 
a product meeting the specifications of a solicitation, including the 
period of performance.
    (d) Waivers for the purchase of software. (1) SBA may grant an 
individual waiver for the procurement of software provided that the 
software being sought is an item that is of a type customarily used by 
the general public or by non-governmental entities for purposes other 
than governmental purposes, and the item:
    (i) Has been sold, leased, or licensed to the general public, or 
has been offered for sale, lease, or license to the general public;
    (ii) Is sold in substantial quantities in the commercial 
marketplace; and
    (iii) Is offered to the Government, without modification, in the 
same form in which it is sold in the commercial marketplace.
    (2) If the value of services provided related to the purchase of a 
supply item that meets the requirements of paragraph (d)(1) of this 
section exceeds the value of the item itself, the procurement should be 
identified as a service procurement, even if the services are provided 
as part of the same license, lease, or sale terms. If a contracting 
officer cannot make a determination of the value of services being 
provided, SBA will assume that the value of the services is greater 
than the value of items or supplies, and will not grant a waiver.
    (3) Subscription services, remote hosting of software, data, or 
other applications on servers or networks of a party other than the 
U.S. Government are considered by SBA to be services and not the 
procurement of a supply item. Therefore SBA will not grant waivers of 
the nonmanufacturer rule for these types of services.

0
13. Amend Sec.  121.1204 by revising paragraphs (b)(1)(ii) and (iii) to 
read as follows:


Sec.  121.1204  What are the procedures for requesting and granting 
waivers?

* * * * *
    (b) * * * (1) * * *
    (ii) The proposed solicitation number, NAICS code, dollar amount of 
the procurement, and a brief statement of the procurement history;
    (iii) A determination by the contracting officer that no small 
business manufacturer or processor reasonably can be expected to offer 
a product or products meeting the specifications (including period of 
performance) required by a particular solicitation. Include a narrative 
describing market research and supporting documentation; and
* * * * *

0
14. Add Sec.  121.1206 to read as follows:


Sec.  121.1206  How will potential offerors be notified of applicable 
waivers?

    (a) Contracting officers must provide written notification to 
potential offerors of any waivers being applied to a specific 
acquisition, whether it is a class waiver or a contract specific 
waiver. This notification must be provided at the time a solicitation 
is issued. If the notification is provided after a solicitation is 
issued, the contracting officer must provide potential offerors a 
reasonable amount of additional time to respond to the solicitation.
    (b) If a contracting officer does not provide notice, and 
additional reasonable time for responses when required, then the waiver 
cannot be applied to the solicitation. This applies to both class 
waivers and individual waivers.

PART 124--8(a) BUSINESS DEVELOPMENT/SMALL DISADVANTAGED BUSINESS 
STATUS DETERMINATIONS

0
15. The authority citation for 13 CFR part 124 is revised to read as 
follows:

    Authority:  15 U.S.C. 634(b)(6), 636(j), 637(a), 637(d), 644 and 
Pub. L. 99-661, Pub. L. 100-656, sec.1207, Pub. L. 101-37, Pub. L. 
101-574, section 8021, Pub. L. 108-87, and 42 U.S.C. 9815.

0
16. Amend Sec.  124.504 by revising paragraph (c)(1)(ii)(B) to read as 
follows:


Sec.  124.504  What circumstances limit SBA's ability to accept a 
procurement for award as an 8(a) contract?

* * * * *
    (c) * * *
    (1) * * *
    (ii) * * *
    (B) Procurements for construction services (e.g., the building of a 
specific structure) are generally deemed to be new requirements. 
However, recurring indefinite delivery or indefinite quantity task or 
delivery order construction services are not considered new (e.g., a 
recurring procurement requiring all construction work at base X).
* * * * *

0
17. Revise Sec.  124.510 to read as follows:

[[Page 34261]]

Sec.  124.510  What limitations on subcontracting apply to an 8(a) 
contract?

    (a) To assist the business development of Participants in the 8(a) 
BD program, there are limitations on the percentage of an 8(a) contract 
award amount that may be spent on subcontractors. The prime contractor 
recipient of an 8(a) contract must comply with the limitations on 
subcontracting at Sec.  125.6 of this chapter.
    (b) Indefinite delivery and indefinite quantity contracts. In order 
to ensure that the required limitations on subcontracting requirements 
on an indefinite delivery or indefinite quantity 8(a) award are met by 
the Participant, the Participant cannot subcontract more than the 
required percentage to subcontractors that are not similarly situated 
entities for each performance period of the contract (i.e., during the 
base term and then during each option period thereafter). However, the 
contracting officer, in his or her discretion, may require the 
Participant to meet the applicable limitation on subcontracting or 
comply with the nonmanufacturer rule for each order.
    (1) This includes Multiple Award Contracts that were set-aside or 
partially set-aside for 8(a) BD Participants.
    (2) For orders that are set aside for eligible 8(a) Participants 
under full and open contracts or reserves, the Participant must meet 
the applicable limitation on subcontracting requirement and comply with 
the nonmanufacturer rule, if applicable, for each order.

0
18. Amend Sec.  124.513 by revising paragraph (b) to read as follows:


Sec.  124.513  Under what circumstances can a joint venture be awarded 
an 8(a) contract?

* * * * *
    (b) Size of concerns to an 8(a) joint venture. (1) A joint venture 
of at least one 8(a) Participant and one or more other business 
concerns may submit an offer as a small business for a competitive 8(a) 
procurement, or be awarded a sole source 8(a) procurement, so long as 
each concern is small under the size standard corresponding to the 
NAICS code assigned to the procurement.
    (2) Notwithstanding the provisions of paragraph (b)(1) of this 
section, a joint venture between a prot[eacute]g[eacute] firm and its 
approved mentor (see Sec.  124.520) will be deemed small provided the 
prot[eacute]g[eacute] qualifies as small for the size standard 
corresponding to the NAICS code assigned to the contract and has not 
reached the dollar limits set forth in Sec.  124.519.
* * * * *

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
19. The authority citation for 13 CFR part 125 is revised to read as 
follows:

    Authority:  15 U.S.C. 632(p), (q); 634(b)(6), 637, 644, 657(f), 
657q; and 657s.


0
20. Amend Sec.  125.1 by:
0
a. Removing paragraphs (f), (g), (h), (m), and (u);
0
b. Removing all alphabetical paragraph designations and placing the 
definitions in alphabetical order;
0
c. Adding in alphabetical order a definition for Similarly situated 
entity to read as follows:


Sec.  125.1  What definitions are important to SBA's Government 
Contracting Programs?

* * * * *
    Similarly situated entity is a subcontractor that has the same 
small business program status as the prime contractor. This means that: 
For a HUBZone requirement, a subcontractor that is a qualified HUBZone 
small business concern; for a small business set-aside, partial set-
aside, or reserve a subcontractor that is a small business concern; for 
a SDVO small business requirement, a subcontractor that is a self-
certified SDVO SBC; for an 8(a) requirement, a subcontractor that is an 
8(a) certified Program Participant; for a WOSB or EDWOSB contract, a 
subcontractor that has complied with the requirements of part 127. In 
addition to sharing the same small business program status as the prime 
contractor, a similarly situated entity must also be small for the 
NAICS code that the prime contractor assigned to the subcontract the 
subcontractor will perform.
* * * * *

0
21. Amend Sec.  125.2 as follows:
0
a. Revise paragraph (b)(1)(i)(A);
0
b. Add paragraph (b)(1)(i)(F);
0
c. Revise the introductory text to paragraph (b)(1)(ii);
0
d. Revise paragraph (b)(1)(iii)(C);
0
e. Add paragraphs (b)(1)(iv) and (v);
0
f. Remove paragraph (b)(2) and redesignate paragraph (b)(3) as 
paragraph (b)(2);
0
g. Revise redesignated paragraph (b)(2);
0
h. Amend paragraph (c)(1)(iv) by removing the term ``and'' at the end 
of the last sentence;
0
i. Amend paragraph (c)(1)(v) by removing the ``.'' at the end of the 
last sentence and adding in its place ``;''.
0
j. Add paragraph (c)(1)(vi); and
0
k. Add paragraph (c)(1)(vii) to read as follows.


Sec.  125.2  What are SBA's and the procuring agency's responsibilities 
when providing contracting assistance to small businesses?

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (A) SBA has PCRs who are generally located at Federal agencies and 
buying activities which have major contracting programs. At the SBA's 
discretion, PCRs will review all acquisitions that are not totally set 
aside for small businesses to determine whether a set-aside or sole 
source award to a small business under one of SBA's programs is 
appropriate and to identify alternative strategies to maximize the 
participation of small businesses in the procurement. PCRs also 
advocate for the maximum practicable utilization of small business 
concerns in Federal contracting, including by advocating against the 
consolidation or bundling of contract requirements, as defined in Sec.  
125.1, and reviewing any justification provided by the agency for 
consolidation or bundling. This review includes acquisitions that are 
Multiple Award Contracts where the agency has not set-aside all or part 
of the acquisition or reserved the acquisition for small businesses. It 
also includes acquisitions where the agency has not set-aside orders 
placed against Multiple Award Contracts for small business concerns.
* * * * *
    (F) PCRs also advocate competitive procedures and recommend the 
breakout for competition of items and requirements which previously 
have not been competed when appropriate. They may appeal the failure by 
the buying activity to act favorably on a recommendation in accord with 
the appeal procedures in paragraph (b)(2) of this section. PCRs also 
review restrictions and obstacles to competition and make 
recommendations for improvement.
    (ii) PCR recommendations. The PCR must recommend to the procuring 
activity alternative procurement methods that would increase small 
business prime contract participation if a PCR believes that a proposed 
procurement includes in its statement of work goods or services 
currently being performed by a small business and is in a quantity or 
estimated dollar value the magnitude of which renders small business 
prime contract participation unlikely; will render small business prime 
contract participation unlikely (e.g., ensure geographical preferences 
are justified); or is for construction and seeks to package or 
consolidate discrete construction projects. If a PCR does not

[[Page 34262]]

believe a bundled or consolidated requirement is necessary or justified 
the PCR shall advocate against the consolidation or bundling of such 
requirement and recommend to the procuring activity alternative 
procurement methods which would increase small business prime contract 
participation. Such alternatives may include:
* * * * *
    (iii) * * *
    (C) Recommending that the small business subcontracting goals be 
based on total contract dollars in addition to goals based on a 
percentage of total subcontracted dollars;
* * * * *
    (iv) PCRs will consult with the agency OSDBU regarding agency 
decisions to convert an activity performed by a small business concern 
to an activity performed by a Federal employee.
    (v) PCRs may receive unsolicited proposals from small business 
concerns and will transmit those proposals to the agency personnel 
responsible for reviewing such proposals. The agency personnel shall 
provide the PCR with information regarding the disposition of such 
proposal.
    (2) Appeals of PCR recommendations. In cases where there is 
disagreement between a PCR and the contracting officer over the 
suitability of a particular acquisition for a small business set-aside, 
partial set-aside or reserve, whether or not the acquisition is a 
bundled, substantially bundled or consolidated requirement, the PCR may 
initiate an appeal to the head of the contracting activity. If the head 
of the contracting activity agrees with the contracting officer, SBA 
may appeal the matter to the Secretary of the Department or head of the 
agency. The time limits for such appeals are set forth in FAR subpart 
19.5 (48 CFR 19.5).
    (c) * * * (1) * * *
    (i) * * *
    (vi) Provide opportunities for the participation of small business 
concerns during acquisition planning processes and in acquisition 
plans; and
    (vii) Invite the participation of the appropriate Director of Small 
and Disadvantaged Business Utilization in acquisition planning 
processes and provide that Director with access to acquisition plans.
* * * * *

0
22. Amend Sec.  125.3 as follows:
0
a. Add paragraphs (c)(8) and (9);
0
b. Revise the first sentence of paragraph (f)(1);
0
c. Revise paragraph (f)(5); and
0
d. Add paragraph (f)(8) to read as follows:


Sec.  125.3  What types of subcontracting assistance are available to 
small businesses?

* * * * *
    (c) * * *
    (8) A prime contractor that identifies a small business by name as 
a subcontractor in a proposal, offer, bid or subcontracting plan must 
notify those subcontractors in writing prior to identifying the concern 
in the proposal, bid, offer or subcontracting plan.
    (9) Anyone who has a reasonable basis to believe that a prime 
contractor or a subcontractor may have made a false statement to an 
employee or representative of the Federal Government, or to an employee 
or representative of the prime contractor, with respect to 
subcontracting plans must report the matter to the SBA Office of 
Inspector General. All other concerns as to whether a prime contractor 
or subcontractor has complied with SBA regulations or otherwise acted 
in bad faith may be reported to the Government Contracting Area Office 
where the firm is headquartered.
* * * * *
    (f) * * * (1) A prime contractor's performance under its 
subcontracting plan is evaluated by means of on-site compliance reviews 
and follow-up reviews, as a supplement to evaluations performed by the 
contracting agency, either on a contract-by-contract basis or, in the 
case of contractors having multiple contracts, on an aggregate basis. * 
* *
* * * * *
    (5) Any contractor that fails to comply with paragraph (f)(4) of 
this section, or any contractor that fails to demonstrate a good-faith 
effort, as set forth in paragraph (d) of this section:
    (i) May be considered for liquidated damages under the procedures 
in 48 CFR 19.705-7 and the clause at 52.219-16; and
    (ii) Shall be in material breach of such contract or subcontract, 
and such failure to demonstrate good faith must be considered in any 
past performance evaluation of the contractor. This action shall be 
considered by the contracting officer upon receipt of a written 
recommendation to that effect from the CMR. The CMR's recommendation 
must include a copy of the compliance report and any other relevant 
correspondence or supporting documentation. Furthermore, if the CMR has 
a reasonable basis to believe that a contractor has made a false 
statement to an employee or representative of the Federal Government, 
or to an employee or representative of the prime contractor, the CMR 
must report the matter to the SBA Office of Inspector General. All 
other concerns as to whether a prime contractor or subcontractor has 
complied with SBA regulations or otherwise acted in bad faith may be 
reported to the Area Government Contracting Office where the firm is 
headquartered.
* * * * *
    (8) The head of the contracting agency shall ensure that:
    (i) The agency collects and reports data on the extent to which 
contractors of the agency meet the goals and objectives set forth in 
subcontracting plans; and
    (ii) The agency periodically reviews data collected and reported 
pursuant to paragraph (f)(8)(i) of this section for the purpose of 
ensuring that such contractors comply in good faith with the 
requirements of this section.
* * * * *

0
23. Amend Sec.  125.5 as follows:
0
a. Revise paragraph (b)(1)(ii);
0
b. Remove paragraphs (b)(1)(iii), (iv) and (v); and
0
c. Add paragraph (f)(3) to read as follows:


Sec.  125.5  What is the Certificate of Competency Program?

* * * * *
    (b) * * * (1) * * *
    (ii) To be eligible for a COC, an offeror must qualify as a small 
business under the applicable size standard in accordance with part 121 
of this chapter, and must have agreed to comply with the applicable 
limitations on subcontracting and the nonmanufacturer rule, where 
applicable.
* * * * *
    (f) * * *
    (3) Where a contracting officer finds a concern to be non-
responsible for reasons of financial capacity on an indefinite delivery 
or indefinite quantity task or delivery order contract, the Area 
Director will consider the firm's maximum financial capacity. If the 
Area Director issues a COC, it will be for a specific amount that is 
the limit of the firm's financial capacity for that contract. The 
contracting officer may subsequently determine to exceed the amount, 
but cannot deny the firm award of an order or contract on financial 
grounds if the firm has not reached the financial maximum the Area 
Director identified in the COC letter.
* * * * *

0
24. Revise Sec.  125.6 to read as follows:


Sec.  125.6  What are the prime contractor's limitations on 
subcontracting?

    (a) General. In order to be awarded a full or partial small 
business set-aside

[[Page 34263]]

contract with a value greater than $150,000, an 8(a) contract, an SDVO 
SBC contract, a HUBZone contract, a WOSB or EDWOSB contract pursuant to 
part 127 of this chapter, with a value greater than $150,000, a small 
business concern must agree that:
    (1) In the case of a contract for services (except construction), 
it will not pay more than 50% of the amount paid by the government to 
it to firms that are not similarly situated. Any work that a similarly 
situated subcontractor further subcontracts will count towards the 50% 
subcontract amount that cannot be exceeded.
    (2)(i) In the case of a contract for supplies or products (other 
than from a nonmanufacturer of such supplies), it will not pay more 
than 50% of the amount paid by the government to it to firms that are 
not similarly situated. Any work that a similarly situated 
subcontractor further subcontracts will count towards the 50% 
subcontract amount that cannot be exceeded. Cost of materials are 
excluded and not considered to be subcontracted.
    (ii) In the case of a contract for supplies from a nonmanufacturer, 
it will supply the product of a domestic small business manufacturer or 
processor, unless a waiver as described in Sec.  121.406(b)(5) of this 
chapter is granted.
    (A) For a multiple item procurement where a waiver as described in 
Sec.  121.406(b)(5) of this chapter has not been granted for one or 
more items, more than 50% of the value of the products to be supplied 
by the nonmanufacturer must be the products of one or more domestic 
small business manufacturers or processors.
    (B) For a multiple item procurement where a waiver as described in 
Sec.  121.406(b)(5) of this chapter is granted for one or more items, 
compliance with the limitation on subcontracting requirement will not 
consider the value of items subject to a waiver. As such, more than 50% 
of the value of the products to be supplied by the nonmanufacturer that 
are not subject to a waiver must be the products of one or more 
domestic small business manufacturers or processors.
    (C) For a multiple item procurement, the same small business 
concern may act as both a manufacturer and a nonmanufacturer.

    Example 1 to paragraph (a)(2).  A contract calls for the supply 
of one item valued at $1,000,000. The market research shows that 
there are no small business manufacturers that produce this item, 
and the contracting officer seeks and is granted a contract specific 
waiver for this item. In this case, a small business nonmanufacturer 
may supply an item manufactured by a large business.
    Example 2 to paragraph (a)(2).  A contract is for $1,000,000 and 
calls for the acquisition of 10 items. Market research shows that 
nine of the items can be sourced from small business manufacturers 
and one item is subject to an SBA class waiver. The projected value 
of the item that is waived is $10,000. Therefore, at least 50% of 
the value of the items not subject to a waiver, or 50% of $990,000, 
must be supplied by one or more domestic small business 
manufacturers, and the prime small business nonmanufacturer may act 
as a manufacturer for one or more items.
    Example 3 to paragraph (a)(2).  A contract is for $1,000,000 and 
calls for the acquisition of 10 items. Market research shows that 
only four of these items are manufactured by small businesses. The 
value of the items manufactured by small business is estimated to be 
$400,000. The contracting officer seeks and is granted waivers on 
the other six items. Therefore, the value of the items granted 
waivers is excluded from the calculation and at least 50% of 
$400,000 would have to be spent by the prime contractor on items it 
manufactures itself, or on items manufactured by one or more other 
small business concerns.
    Example 4 to paragraph (a)(2).  A contract is for $1,000,000 and 
calls for the acquisition of 10 items. Market research shows that 
eight of the items can be sourced from small business manufacturers, 
and the estimated value of these items is $800,000. At least 50% of 
the value of the contract (i.e., at least $500,000) will be spent on 
items manufactured by one or more small business concerns. As such, 
the contracting officer is not required to request contract specific 
waivers for the other two items valued at $200,000. In this case, 
the prime contractor can meet the requirement by sourcing some of 
the items from small businesses manufacturers and some from large 
businesses without a waiver and still satisfy the requirement.

    (3) In the case of a contract for general construction, it will not 
pay more than 85% of the amount paid by the government to it to firms 
that are not similarly situated. Any work that a similarly situated 
subcontractor further subcontracts will count towards the 85% 
subcontract amount that cannot be exceeded. Cost of materials are 
excluded and not considered to be subcontracted.
    (4) In the case of a contract for special trade contractors, no 
more than 75% of the amount paid by the government to the prime may be 
paid to firms that are not similarly situated. Any work that a 
similarly situated subcontractor further subcontracts will count 
towards the 75% subcontract amount that cannot be exceeded. Cost of 
materials are excluded and not considered to be subcontracted.
    (b) Mixed contracts. Where a contract combines services and 
supplies, the contracting officer shall select the appropriate NAICS 
code as prescribed in Sec.  121.402(b) of this chapter. The contracting 
officer's selection of the applicable NAICS code is determinative as to 
which limitation on subcontracting and performance requirement applies. 
In no case shall the requirements of paragraph (a)(1) and (a)(2) of 
this section both apply to the same contract. The relevant limitation 
on subcontracting in paragraph (a)(1) or (a)(2) of this section shall 
apply only to that portion of the contract award amount.

    Example 1 to paragraph (b).  A procuring agency is acquiring 
both services and supplies through a small business set-aside. The 
total value of the requirement is $3,000,000, with the supply 
portion comprising $2,500,000, and the services portion comprising 
$500,000. The contracting officer appropriately assigns a 
manufacturing NAICS code to the requirement. The cost of material is 
$500,000. Thus, because the services portion of the contract and the 
cost of materials are excluded from consideration, the relevant 
amount for purposes of calculating the performance of work 
requirement is $2,000,000 and the prime and/or similarly situated 
entities must perform at least $1,000,000 and the prime contractor 
may not subcontract more than $1,000,000 to non-similarly situated 
entities.
    Example 2 to paragraph (b).  A procuring agency is acquiring 
both services and supplies through a small business set-aside. The 
total value of the requirement is $3,000,000, with the services 
portion comprising $2,500,000, and the supply portion comprising 
$500,000. The contracting officer appropriately assigns a services 
NAICS code to the requirement. Thus, because the supply portion of 
the contract is excluded from consideration, the relevant amount for 
purposes of calculating the performance of work requirement is 
$2,500,000 and the prime and/or similarly situated entities must 
perform at least $1,250,000 and the prime contractor may not 
subcontract more than $1,250,000 to non-similarly situated entities.

    (c) Subcontracts to similarly situated entities. A small business 
concern prime contractor that receives a contract listed in paragraph 
(a) of this section and spends contract amounts on a subcontractor that 
is a similarly situated entity shall not consider those subcontracted 
amounts as subcontracted for purposes of determining whether the small 
business concern prime contractor has violated paragraph (a) of this 
section, to the extent the subcontractor performs the work with its own 
employees. Any work that the similarly situated subcontractor does not 
perform with its own employees shall be considered subcontracted SBA 
will also exclude a subcontract to a similarly situated entity from 
consideration under the ostensible subcontractor rule (Sec.  
121.103(h)(4)).


[[Page 34264]]


    Example 1 to paragraph (c):  An SDVO SBC sole source contract is 
awarded in the total amount of $500,000 for hammers. The prime 
contractor is a manufacturer and subcontracts 51% of the total 
amount received, less the cost of materials ($100,000) or $204,000, 
to an SDVO SBC subcontractor that manufactures the hammers in the 
U.S. The prime contractor does not violate the limitation on 
subcontracting requirement because the amount subcontracted to a 
similarly situated entity (less the cost of materials) is excluded 
from the limitation on subcontracting calculation.
    Example 2 to paragraph (c):  A competitive 8(a) BD contract is 
awarded in the total amount of $10,000,000 for janitorial services. 
The prime contractor subcontracts $8,000,000 of the janitorial 
services to another 8(a) BD certified firm. The prime contractor 
does not violate the limitation on subcontracting for services 
because the amount subcontracted to a similarly situated entity is 
excluded from the limitation on subcontracting.
    Example 3 to paragraph (c):  A WOSB set-aside contract is 
awarded in the total amount of $1,000,000 for landscaping services. 
The prime contractor subcontracts $500,001 to an SDVO SBC 
subcontractor that is not also a WOSB under the WOSB program. The 
prime contractor is in violation of the limitation on subcontracting 
requirement because it has subcontracted more than 50% of the 
contract amount to an SDVO SBC subcontractor, which is not 
considered similarly situated to a WOSB prime contractor.

    (d) HUBZone procurement for commodities. In the case of a HUBZone 
contract for the procurement of agricultural commodities, a HUBZone SBC 
may not purchase the commodity from a subcontractor if the 
subcontractor will supply the commodity in substantially the final form 
in which it is to be supplied to the Government.
    (e) 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. For an order set aside under a full and open 
contract or a full and open contract with reserve, the agency will use 
the period of performance for each order to determine compliance unless 
the order is competed among small and other-than-small businesses (in 
which case the subcontracting limitations will not apply).
    (1) The contracting officer, in his or her discretion, may require 
the concern to comply with the applicable limitations on subcontracting 
and the nonmanufacturer rule for each order awarded under a total or 
partial set-aside contract.
    (2) Compliance will be considered an element of responsibility and 
not a component of size eligibility.
    (3) Work performed by an independent contractor shall be considered 
a subcontract, and may count toward meeting the applicable limitation 
on subcontracting where the independent contractor qualifies as a 
similarly situated entity.
    (f) Inapplicability of limitations on subcontracting. The 
limitations on subcontracting do not apply to:
    (1) Small business set-aside contracts with a value greater than 
$3,500 but not $150,000, or
    (2) Subcontracts (except where a prime is relying on a similarly 
situated entity to meet the applicable limitations on subcontracting).
    (g) Request to change applicable limitation on subcontracting. SBA 
may use different percentages if the Administrator determines that such 
action is necessary to reflect conventional industry practices among 
small business concerns that are below the numerical size standard for 
businesses in that industry group. Representatives of a national trade 
or industry group or any interested SBC may request a change in 
subcontracting percentage requirements for the categories defined by 
six digit industry codes in the North American Industry Classification 
System (NAICS) pursuant to the following procedures:
    (1) Format of request. Requests from representatives of a trade or 
industry group and interested SBCs should be in writing and sent or 
delivered to the Director, Office of Government Contracting, U.S. Small 
Business Administration, 409 3rd Street SW., Washington, DC 20416. The 
requester must demonstrate to SBA that a change in percentage is 
necessary to reflect conventional industry practices among small 
business concerns that are below the numerical size standard for 
businesses in that industry category, and must support its request with 
information including, but not limited to:
    (i) Information relative to the economic conditions and structure 
of the entire national industry;
    (ii) Market data, technical changes in the industry and industry 
trends;
    (iii) Specific reasons and justifications for the change in the 
subcontracting percentage;
    (iv) The effect such a change would have on the Federal procurement 
process; and
    (v) Information demonstrating how the proposed change would promote 
the purposes of the small business, 8(a), SDVO, HUBZone, WOSB, or 
EDWOSB programs.
    (2) Notice to public. Upon an adequate preliminary showing to SBA, 
SBA will publish in the Federal Register a notice of its receipt of a 
request that it considers a change in the subcontracting percentage 
requirements for a particular industry. The notice will identify the 
group making the request, and give the public an opportunity to submit 
information and arguments in both support and opposition.
    (3) Comments. SBA will provide a period of not less than 30 days 
for public comment in response to the Federal Register notice.
    (4) Decision. SBA will render its decision after the close of the 
comment period. If SBA decides against a change, SBA will publish 
notice of its decision in the Federal Register. Concurrent with the 
notice, SBA will advise the requester of its decision in writing. If 
SBA decides in favor of a change, SBA will propose an appropriate 
change to this part.
    (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)).
* * * * *

0
25. Amend Sec.  125.15 by revising paragraphs (a)(3), (b)(1), and 
(b)(3) to read as follows:


Sec.  125.15  What requirements must an SDVO SBC meet to submit an 
offer on a contract?

    (a) * * *
    (3) It will comply with the limitations on subcontracting 
requirements set forth in Sec.  125.6;
* * * * *
    (b) * * *
    (1) Size of concerns to an SDVO SBC joint venture. A joint venture 
of at least one SDVO SBC and one or more other business concerns may 
submit an offer as a small business for a competitive SDVO SBC 
procurement, or be awarded a sole source SDVO contract, so long as each 
concern is small under the size standard corresponding to the NAICS 
code assigned to the procurement.
* * * * *
    (3) Limitations on subcontracting. For any SDVO contract, the joint 
venture must comply with the applicable

[[Page 34265]]

limitations on subcontracting required by Sec.  125.6.
* * * * *


Sec.  125.20  [Amended]

0
26. Amend Sec.  125.20 as follows:
0
a. In paragraph (b)(1), remove ``$5,500,000'' and add in its place 
``$6,000,000''; and
0
b. In paragraph (b)(2), remove ``$3,000,000'' and add in its place 
``$3,500,000''.
* * * * *


Sec.  125.26  [Amended]

0
27. Amend Sec.  125.26 by removing the phrase ``Associate Administrator 
for Government Contracting'' and adding in its place the phrase 
``Director, Office of Government Contracting'' in paragraph (b).

PART 126--HUBZONE PROGRAM

0
28. The authority citation for 13 CFR part 126 continues to read as 
follows:

    Authority:  15 U.S.C. 632(a), 632(j), 632(p), 644, and 657a.


0
29. Amend Sec.  126.200 by revising paragraph (b)(6) and removing 
paragraph (d) to read as follows:


Sec.  126.200  What requirements must a concern meet to receive SBA 
certification as a qualified HUBZone SBC?

* * * * *
    (b) * * *
    (6) Subcontracting. The concern must represent, as provided in the 
application, that it will comply with the applicable limitations on 
subcontracting requirements in connection with any procurement that it 
receives as a qualified HUBZone SBC, as set forth in Sec.  126.5 and 
Sec.  126.700.
* * * * *

0
30. Amend Sec.  126.601 by revising paragraph (f) to read as follows:


Sec.  126.601  What additional requirements must a HUBZone SBC meet to 
bid on a contract?

* * * * *
    (f) A qualified HUBZone SBC may submit an offer on a HUBZone 
contract for supplies as a nonmanufacturer if it meets the requirements 
of the nonmanufacturer rule set forth at Sec.  121.406 of this chapter.
* * * * *

0
31. Revise Sec.  126.700 to read as follows:


Sec.  126.700  What are the limitations on subcontracting requirements 
for HUBZone contracts?

    A prime contractor receiving an award as a qualified HUBZone SBC 
must meet the limitations on subcontracting requirements set forth in 
Sec.  125.6 of this chapter.

PART 127--WOMEN-OWNED SMALL BUSINESS FEDERAL CONTRACT PROGRAM

0
32. The authority citation for 13 CFR part 127 continues to read as 
follows:

    Authority:  15 U.S.C. 632, 634(b)(6), 637(m), and 644.


0
33. Amend Sec.  127.504 by revising paragraph (b) to read as follows:


Sec.  127.504  What additional requirements must a concern satisfy to 
submit an offer on an EDWOSB or WOSB requirement?

* * * * *
    (b) The concern must also meet the applicable limitations on 
subcontracting requirements as set forth in Sec.  125.6 of this 
chapter.

0
34. Amend Sec.  127.506 by revising paragraphs (a) and (d) to read as 
follows:


Sec.  127.506  May a joint venture submit an offer on an EDWOSB or WOSB 
requirement?

* * * * *
    (a) Size of concerns. A joint venture of at least one WOSB or 
EDWOSB and one or more other business concerns may submit an offer as a 
small business for a competitive WOSB or EDWOSB procurement so long as 
each concern is small under the size standard corresponding to the 
NAICS code assigned to the procurement;
* * * * *
    (d) The joint venture must comply with the limitations on 
subcontracting, as required by Sec.  125.6 of this chapter;
* * * * *

Maria Contreras-Sweet,
Administrator.
[FR Doc. 2016-12494 Filed 5-27-16; 8:45 am]
 BILLING CODE 8025-01-P