[Federal Register Volume 89, Number 11 (Wednesday, January 17, 2024)]
[Proposed Rules]
[Pages 2910-2913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00728]



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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 19 and 52

[FAR Case 2021-020; Docket No. FAR-2021-0020; Sequence No. 1]
RIN 9000-AO36


Federal Acquisition Regulation: Limitations on Subcontracting 
Revisions

AGENCY: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Proposed rule.

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SUMMARY: DoD, GSA, and NASA are proposing to amend the Federal 
Acquisition Regulation (FAR) to implement regulatory changes made by 
the Small Business Administration to update and clarify requirements 
associated with the limitations on subcontracting and the 
nonmanufacturer rule.

DATES: Interested parties should submit written comments to the 
Regulatory Secretariat Division at the address shown below on or before 
March 18, 2024 to be considered in the formation of the final rule.

ADDRESSES: Submit comments in response to FAR Case 2021-020 to the 
Federal eRulemaking portal at https://www.regulations.gov by searching 
for ``FAR Case 2021-020''. Select the link ``Comment Now'' that 
corresponds with ``FAR Case 2021-020''. Follow the instructions 
provided on the ``Comment Now'' screen. Please include your name, 
company name (if any), and ``FAR Case 2021-020'' on your attached 
document. If your comment cannot be submitted using https://www.regulations.gov, call or email the points of contact in the FOR 
FURTHER INFORMATION CONTACT section of this document for alternate 
instructions.
    Instructions: Please submit comments only and cite ``FAR Case 2021-
020'' in all correspondence related to this case. Comments received 
generally will be posted without change to https://www.regulations.gov, 
including any personal and/or business confidential information 
provided. Public comments may be submitted as an individual, as an 
organization, or anonymously (see frequently asked questions at https://www.regulations.gov/faq). To confirm receipt of your comment(s), 
please check https://www.regulations.gov, approximately two to three 
days after submission to verify posting.

FOR FURTHER INFORMATION CONTACT: Ms. Carrie Moore, Procurement Analyst, 
at 571-300-5917 or by email at [email protected], for clarification 
of content. For information pertaining to status, publication 
schedules, or alternate instructions for submitting comments if https://www.regulations.gov cannot be used, contact the Regulatory Secretariat 
Division at 202-501-4755 or [email protected]. Please cite FAR Case 
2021-020.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD, GSA, and NASA are proposing to amend the FAR to implement 
regulatory changes made by the Small Business Administration (SBA) in 
its final rules published on May 31, 2016, at 81 FR 34243; on November 
29, 2019, at 84 FR 65647; and on October 16, 2020, at 85 FR 66146.
    SBA's final rule published on May 31, 2016, which implements 
section 1651 of the National Defense Authorization Act for Fiscal Year 
2013 (Pub. L. 112-239) as codified at 15 U.S.C. 657s, standardized the 
limitations on subcontracting and nonmanufacturer rule across the small 
business socioeconomic programs, and modified its regulations to 
specify that a similarly situated entity subcontractor must perform the 
work with its own employees. SBA's final rule was implemented via the 
final rule for FAR case 2016-011 published on August 11, 2021, at 86 FR 
44233. However, the FAR final rule did not modify FAR 19.8, Contracting 
with the Small Business Administration (The 8(a) Program), to align it 
with the changes made to the socioeconomic programs at FAR subparts 
19.13, 19.14, and 19.15.
    In addition, this proposed rule implements regulatory changes made 
by SBA in its final rules published on November 29, 2019, and on 
October 16, 2020, to clarify requirements on the application of the 
limitations on subcontracting, provide exclusions of certain costs from 
the limitations on subcontracting calculation for services, and remove 
specific rules related to kit assemblers from the nonmanufacturer rule. 
The explanation for these changes is in the preamble of SBA's final 
rules.

II. Discussion and Analysis

    The proposed changes to the FAR and the rationale are summarized as 
follows:

--Modify FAR 19.505(b)(1) introductory text to implement SBA's 
regulations at 13 CFR 125.6(b) to make clear that only one of the 
limitations of subcontracting apply to a contract;
--Modify FAR 19.505(b)(1)(i) and paragraph (e)(1) of FAR clause 52.219-
14 to implement SBA's regulations at 13 CFR 125.6(a)(1) to permit the 
exclusion of other direct costs that are not the principal purpose of 
the contract, and are not performed by small businesses, from the 
limitations on subcontracting requirements for a service contract, and 
to exclude work performed outside the United States on a contract 
approved or financed under the Foreign Assistance Act of 1961 (Pub. L. 
87-195, 22 U.S.C. 2151 et seq.), and work required to be performed by a 
foreign contractor, from the limitations on subcontracting requirements 
for service contracts;
--Modify FAR 19.505(b)(1)(iii) and (iv) and paragraphs (e)(3) and 
(e)(4) of FAR clause 52.219-14 to implement SBA's regulations at 13 CFR 
125.6(b) to clarify that the limitation on subcontracting applies to 
contracts for general construction or for construction by special trade 
contractors when the contract also includes supplies and/or services;
--Modify FAR 19.505(b)(1)(i) through (iv) and paragraphs (e)(1) through 
(4) of FAR clause 52.219-14, Limitations on Subcontracting, to clarify 
that any work that a similarly situated entity further subcontracts out 
will count towards the prime contract's limitation on subcontracting;
--Modify FAR 19.505(c) to remove paragraph (c)(2), renumber the 
remaining paragraphs, and remove the text and references to the unique 
standard for kit assemblers when applying the nonmanufacturer rule to 
implement SBA's regulations at 13 CFR 121.406(c) and 13 CFR 121.406(e). 
Upon removal of the standard for kit assemblers, agencies should apply 
the policy now at FAR 19.505(c)(4) to multiple item acquisitions;
--Remove and reserve FAR 19.809-2, Limitations on subcontracting and 
nonmanufacturer rule, to implement SBA's regulations at 13 CFR 124.510 
to eliminate the unique requirements of the limitations on 
subcontracting and nonmanufacturer rule for 8(a) contractors; and
--Modify paragraph (c)(1)(i), remove paragraph (c)(2), and renumber the 
paragraphs of FAR clause 52.219-33, Nonmanufacturer Rule, to implement 
SBA's regulations at 13 CFR 121.406(c) and 13 CFR 121.406(e)) to remove 
text and references to the unique standard for kit assemblers

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when applying the nonmanufacturer rule.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold (SAT), for Commercial Products (Including Commercially 
Available Off-the-Shelf (COTS) Items), or for Commercial Services

    This rule amends the clauses at FAR 52.212-5, 52.219-14, and 
52.219-33. The clauses continue to apply to acquisitions at or below 
the SAT and to acquisitions for commercial products, including COTS 
items, and commercial services, as they did prior to this rule.

IV. Expected Impact of the Rule

    This proposed rule simplifies and clarifies the limitations on 
subcontracting requirements and the nonmanufacturer rule; therefore, 
this rule is expected to make it easier for offerors, contractors, and 
contracting officers to implement the regulations. This proposed rule 
is expected to benefit small businesses and the Government by allowing 
concerns to exclude certain costs from the calculation of the 
limitations on subcontracting and excluding certain costs for the 
calculation of the limitations on subcontracting, which may increase 
small business participation and ensure that the benefits of set-aside 
contracts flow to the intended beneficiaries.

V. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 (as amended by E.O. 14094) and 13563 
direct agencies to assess the costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). E.O. 13563 emphasizes the importance of 
quantifying both costs and benefits, of reducing costs, of harmonizing 
rules, and of promoting flexibility. This is not a significant 
regulatory action and, therefore, was not subject to review under 
section 6(b) of E.O. 12866, Regulatory Planning and Review, dated 
September 30, 1993.

VI. Regulatory Flexibility Act

    DoD, GSA, and NASA do not expect this proposed rule to have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601-612, 
because this rule merely standardizes, clarifies, and simplifies the 
requirements for compliance with the limitations on subcontracting and 
the nonmanufacturer rule. However, an Initial Regulatory Flexibility 
Analysis (IRFA) has been performed and is summarized as follows:

    DoD, GSA, and NASA are proposing to amend the Federal 
Acquisition Regulation (FAR) to implement regulatory changes made by 
the Small Business Administration (SBA) in its final rule published 
on May 31, 2016, at 81 FR 34243, to implement section 1651 of the 
National Defense Authorization Act for Fiscal Year 2013 (Pub. L. 
112-239) which amended 15 U.S.C. 657s to standardize the limitations 
on subcontracting and nonmanufacturer rule across the small business 
programs. This proposed rule also implements SBA's final rules 
published on November 29, 2019, at 84 FR 65647, and on October 16, 
2020, at 85 FR 66146. This rule proposes to standardize the 
limitations on subcontracting and nonmanufacturer rule among the 
small business programs and update and clarify requirements 
associated with the limitations on subcontracting and 
nonmanufacturer rule.
    The objective of this rule is to implement SBA's regulatory 
changes that provide exclusions of certain costs from the 
limitations on subcontracting calculation for services, and remove 
specific rules related to kit assemblers from the nonmanufacturer 
rule. The proposed rule clarifies that a similarly situated entity, 
first-tier subcontractor must perform the work with its own 
employees or the work will be counted towards the prime contractor's 
limitation on subcontracting; permits the exclusion of other direct 
costs that are not the principal purpose of the acquisition and not 
performed by small businesses from the limitations on subcontracting 
calculation; for service contracts, excludes from the limitations on 
subcontracting calculation work performed outside the United States 
on contracts or orders approved or financed under the Foreign 
Assistance Act of 1961 (Pub. L. 87-195, 22 U.S.C. 2151 et seq.) and 
work required to be performed by a foreign contractor; removes 
specific nonmanufacturer regulations applicable to kit assemblers; 
clarifies which limitation on subcontracting applies for contracts 
for general construction and construction by special trade 
contractors when the contract includes construction and supplies 
and/or services; and removes the separate limitations on 
subcontracting regulations for 8(a) contractors. The legal basis for 
this rule is as stated in the preceding paragraph. Promulgation of 
the FAR is authorized by 40 U.S.C. 121(c); 10 U.S.C. chapter 4 and 
10 U.S.C. chapter 137 legacy provisions (see 10 U.S.C. 3016); and 51 
U.S.C. 20113.
    This proposed rule will impact small businesses that enter into 
contracts with the Government that are set-aside for any of the 
small business concerns identified at FAR 19.000(a)(3). This 
proposed rule may have a positive economic impact on small 
businesses because it will make the application of the limitations 
on subcontracting and nonmanufacturer rule consistent across all of 
the small business socioeconomic programs, will exclude certain 
costs from the limitations on subcontracting calculation, and will 
simplify the nonmanufacturer rule. The ability to exclude certain 
costs from the limitations on subcontracting calculation will make 
it possible for small businesses to compete for higher dollar value 
service contracts.
    According to the System for Award Management (SAM), there are 
355,208 active registrants that are considered small for at least 
one North American Industry Classification System code. Small 
business entities seeking to be prime contractors for Government 
contracts are required to register in SAM; however, those seeking to 
be subcontractors are not required to register in SAM. Therefore, 
the number of small business entities impacted by this rule may be 
greater than the number of entities registered in SAM.
    The proposed rule does not impose any new reporting, 
recordkeeping, or other compliance requirements for small entities.
    The proposed rule does not duplicate, overlap, or conflict with 
any other Federal rules.
    There are no known significant alternative approaches to the 
proposed rule.

    The Regulatory Secretariat Division has submitted a copy of the 
IRFA to the Chief Counsel for Advocacy of the Small Business 
Administration. A copy of the IRFA may be obtained from the Regulatory 
Secretariat Division. DoD, GSA, and NASA invite comments from small 
business concerns and other interested parties on the expected impact 
of this proposed rule on small entities.
    DoD, GSA, and NASA will also consider comments from small entities 
concerning the existing regulations in subparts affected by the rule in 
accordance with 5 U.S.C. 610. Interested parties must submit such 
comments separately and should cite 5 U.S.C. 610 (FAR Case 2021-020) in 
correspondence.

VII. Paperwork Reduction Act

    This rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. 3501-3521).

List of Subjects in 48 CFR Parts 19 and 52

    Government procurement.

William F. Clark,
Director, Office of Government-wide Acquisition Policy, Office of 
Acquisition Policy, Office of Government-wide Policy.

    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 19 and 
52 as set forth below:

0
1. The authority citation for 48 CFR parts 19 and 52 continues to read 
as follows:


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    Authority:  40 U.S.C. 121(c); 10 U.S.C. chapter 4 and 10 U.S.C. 
chapter 137 legacy provisions (see 10 U.S.C. 3016); and 51 U.S.C. 
20113.

PART 19--SMALL BUSINESS PROGRAMS

0
2. Amend section 19.505 by--
0
a. Revising paragraph (b)(1);
0
b. Revising the introductory text of paragraph (c);
0
c. Removing from paragraph (c)(1)(i) ``paragraph (c)(3)'' and adding 
``paragraph (c)(2)'' in its place;
0
d. Removing paragraph (c)(2);
0
e. Redesignating paragraphs (c)(3) through (c)(5) as paragraphs (c)(2) 
through (c)(4); and
0
f. Removing from paragraphs (c)(3)(i)(A) and (B) ``or (c)(2)(ii)''.
    The revisions read as follows:


19.505   Limitations on subcontracting and nonmanufacturer rule.

* * * * *
    (b)(1) Limitations on subcontracting. A small business concern 
subject to the limitations on subcontracting is required to comply with 
one of the following:
    (i) For a contract or order assigned a North American Industry 
Classification System (NAICS) code for services (except construction), 
the concern will not pay more than 50 percent of the amount paid by the 
Government for contract performance to subcontractors that are not 
similarly situated entities. Any work that a similarly situated entity 
does not perform with its own employees or further subcontracts will 
count towards the concern's 50 percent subcontract amount that cannot 
be exceeded. Other direct costs may be excluded from the 50 percent 
limitation when they are not the principal purpose of the contract or 
order, and small business concerns do not provide the service (e.g., 
airline travel, work performed by a transportation or disposal entity 
under a contract assigned the environmental remediation NAICS code 
562910, cloud computing services, or mass media purchases). Work 
performed outside the United States on a contract or order approved or 
financed under the Foreign Assistance Act of 1961 (Pub. L. 87-195, 22 
U.S.C. 2151 et seq.) and work required to be performed by a foreign 
contractor are excluded from the 50 percent limitation. When a contract 
includes both services and supplies, the 50 percent limitation shall 
apply only to the service portion of the contract.
    (ii) For a contract or order assigned a NAICS code for supplies or 
products (other than a procurement from a nonmanufacturer of such 
supplies or products), the concern will not pay more than 50 percent of 
the amount paid by the Government for contract performance, excluding 
the cost of materials, to subcontractors that are not similarly 
situated entities. Any work that a similarly situated entity does not 
perform with its own employees or further subcontracts will count 
towards the concern's 50 percent subcontract amount that cannot be 
exceeded. When a contract includes both supplies and services, the 50 
percent limitation shall apply only to the supply portion of the 
contract.
    (iii) For a contract or order assigned a NAICS code for general 
construction, the concern will not pay more than 85 percent of the 
amount paid by the Government for contract performance, excluding the 
cost of materials, to subcontractors that are not similarly situated 
entities. Any work that a similarly situated entity does not perform 
with its own employees or further subcontracts will count towards the 
concern's 85 percent subcontract amount that cannot be exceeded. When a 
contract includes general construction and supplies and/or services, 
the 85 percent limitation shall apply only to the general-construction 
portion of the contract.
    (iv) For a contract or order assigned a NAICS code for construction 
by special trade contractors, the concern will not pay more than 75 
percent of the amount paid by the Government for contract performance, 
excluding the cost of materials, to subcontractors that are not 
similarly situated entities. Any work that a similarly situated entity 
does not perform with its own employees or further subcontracts will 
count towards the concern's 75 percent subcontract amount that cannot 
be exceeded. When a contract includes construction by special trade 
contractors and supplies and/or services, the 75 percent limitation 
shall apply only to the construction-by-special-trade-contractors 
portion of the contract.
* * * * *
    (c) Nonmanufacturer rule. The nonmanufacturer rule applies to 
nonmanufacturers in accordance with paragraph (c)(1) of this section.
* * * * *


19.809-2   Removed and Reserved.

0
3. Amend section 19.809-2 by removing and reserving it.
0
4. Amend section 19.811-3 by--
0
a. Revising paragraph (e); and
0
b. Adding paragraph (f).
    The revision and addition reads as follows:


19.811-3   Contract clauses.

* * * * *
    (e) For use of clause 52.219-14, Limitations on Subcontracting, see 
the prescription at 19.507(e).
    (f) For use of clause 52.219-33, Nonmanufacturer Rule, see the 
prescription at 19.507(h).

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
5. Amend section 52.212-5 by--
0
a. Revising the date of the clause; and
0
b. Revising the date of paragraphs (b)(23) and (30).


52.212-5  Contract Terms and Conditions Required To Implement Statutes 
or Executive Orders--Commercial Products and Commercial Services.

* * * * *

Contract Terms and Conditions Required To Implement Statutes or 
Executive Orders--Commercial Products and Commercial Services (Date)

* * * * *
    (b) * * *
    __(23) 52.219-14, Limitations on Subcontracting (DATE) (15 
U.S.C. 657s).
* * * * *
    __(30) 52.219-33, Nonmanufacturer Rule (DATE) (15 U.S.C. 657s).
* * * * *
0
6. Amend section 52.219-14 by--
0
a. Revising the date of the clause; and
0
b. Revising the paragraphs (e)(1) through (4).
    The revisions read as follows:


52.219-14   Limitations on Subcontracting.

* * * * *

Limitations on Subcontracting (Date)

* * * * *
    (e) * * *
    (1) Services (except construction), it will not pay more than 50 
percent of the amount paid by the Government for contract 
performance to subcontractors that are not similarly situated 
entities. Any work that a similarly situated entity does not perform 
with its own employees or further subcontracts will count towards 
the prime contractor's 50 percent subcontract amount that cannot be 
exceeded. Other direct costs may be excluded from the 50 percent 
limitation when they are not the principal purpose of the contract 
or order, and small business concerns do not provide the service 
(e.g., airline travel, work performed by a transportation or 
disposal entity under a contract assigned the environmental 
remediation NAICS code 562910, cloud computing services, or mass 
media purchases). Work performed outside the United States on a 
contract or order approved or financed under the Foreign Assistance 
Act of 1961 (Pub. L. 87-195, 22 U.S.C. 2151 et seq.) and work 
required to be performed by a foreign contractor are excluded from 
the 50 percent limitation. When a contract includes both services 
and supplies, the 50 percent

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limitation shall apply only to the service portion of the contract;
    (2) Supplies (other than procurement from a nonmanufacturer of 
such supplies), it will not pay more than 50 percent of the amount 
paid by the Government for contract performance, excluding the cost 
of materials, to subcontractors that are not similarly situated 
entities. Any work that a similarly situated entity does not perform 
with its own employees or further subcontracts will count towards 
the prime contractor's 50 percent subcontract amount that cannot be 
exceeded. When a contract includes both supplies and services, the 
50 percent limitation shall apply only to the supply portion of the 
contract;
    (3) General construction, it will not pay more than 85 percent 
of the amount paid by the Government for contract performance, 
excluding the cost of materials, to subcontractors that are not 
similarly situated entities. Any work that a similarly situated 
entity does not perform with its own employees or further 
subcontracts will count towards the prime contractor's 85 percent 
subcontract amount that cannot be exceeded. When a contract includes 
general construction and supplies and/or services, the 85 percent 
limitation shall apply only to the general-construction portion of 
the contract; or
    (4) Construction by special trade contractors, it will not pay 
more than 75 percent of the amount paid by the Government for 
contract performance, excluding the cost of materials, to 
subcontractors that are not similarly situated entities. Any work 
that a similarly situated entity does not perform with its own 
employees or further subcontracts will count towards the prime 
contractor's 75 percent subcontract amount that cannot be exceeded. 
When a contract includes construction by special trade contractors 
and supplies and/or services, the 75 percent limitation shall apply 
only to the construction-by-special-trade-contractors portion of the 
contract.
* * * * *
0
7. Amend section 52.219-33 by--
0
a. Revising the date of clause; and
0
b. Revising paragraph (c).
    The revisions read as follows:


52.219-33   Nonmanufacturer Rule.

* * * * *

Nonmanufacturer Rule (Date)

* * * * *
    (c) Requirements. The Contractor shall--
    (1) Provide an end item that a small business has manufactured, 
processed, or produced in the United States or its outlying areas;
    (2) Be primarily engaged in the retail or wholesale trade and 
normally sell the type of item being supplied; and
    (3) Take ownership or possession of the item(s) with its 
personnel, equipment, or facilities in a manner consistent with 
industry practice; for example, providing storage, transportation, 
or delivery.
* * * * *
[FR Doc. 2024-00728 Filed 1-16-24; 8:45 am]
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