[Federal Register Volume 79, Number 248 (Monday, December 29, 2014)]
[Proposed Rules]
[Pages 77955-77970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29753]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 79, No. 248 / Monday, December 29, 2014 / 
Proposed Rules

[[Page 77955]]



SMALL BUSINESS ADMINISTRATION

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

[Docket No. SBA-2014-0006]
RIN 3245-AG58


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

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) is 
proposing to amend its 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. SBA is 
also proposing to make changes to its regulations concerning the 
nonmanufacturer rule and affiliation rules. Further, SBA is proposing 
to allow 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. Finally, SBA is requesting 
comments on the timeline and procedures for North American Industry 
Classification System code appeals.

DATES: Comments must be received on or before February 27, 2015.

ADDRESSES: You may submit comments, identified by RIN: 3245-AG58, by 
any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> For mail, paper, disk, or CD/ROM submissions: Brenda 
Fernandez, U.S. Small Business Administration, Office of Policy, 
Planning and Liaison, 409 Third Street SW., 8th Floor, Washington, DC 
20416.
    <bullet> Hand Delivery/Courier: Brenda Fernandez, U.S. Small 
Business Administration, Office of Policy, Planning and Liaison, 409 
Third Street SW., 8th Floor, Washington, DC 20416.
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to Brenda 
Fernandez, U.S. Small Business Administration, Office of Policy, 
Planning and Liaison, 409 Third Street SW., 8th Floor, Washington, DC 
20416, or send an email to <a href="/cdn-cgi/l/email-protection#cfadbdaaa1abaee1a9aabda1aea1abaab58fbcadaee1a8a0b9"><span class="__cf_email__" data-cfemail="f19383949f9590df9794839f909f95948bb1829390df969e87">[email protected]</span></a>. Highlight the 
information that you consider to be CBI and explain why you believe SBA 
should hold this information as confidential. SBA will review the 
information and make the final determination on whether it will publish 
the information.

FOR FURTHER INFORMATION CONTACT: Brenda Fernandez, Office of Policy, 
Planning and Liaison, 409 Third Street SW., Washington, DC 20416; (202) 
207-7337; <a href="/cdn-cgi/l/email-protection#315343545f55501f5754435f505f55544b714253501f565e47"><span class="__cf_email__" data-cfemail="543626313a30357a3231263a353a30312e142736357a333b22">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

Proposed Changes Pursuant to the National Defense Authorization Act of 
2013

    Section 1621 of the National Defense Authorization Act of 2013 
(NDAA), Pub. L. 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 proposes to 
amend 13 CFR 125.2(b)(1)(i)(A), based on the changes in Section 
1621(c)(6)(H) of the NDAA. This rule would 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 proposes new 
Sec.  125.2(b)(1)(iv), which states that PCRs will consult with the 
agency's Office of Small and Disadvantaged Business (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 proposes 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 also proposes to amend paragraphs 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 proposes to reassign the responsibilities 
currently held by BPCRs to PCRs. SBA proposes 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 proposes the elimination of Sec.  125.2(b)(2) that 
provided guidance on the role and responsibilities of BPCRs and 
proposes redesignating current Sec.  125.2(b)(3) as the new Sec.  
125.2(b)(2) and removing any reference to BPCRs from that paragraph.
    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, 
SDVO SBC contracts, and WOSB and 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. When a contract is awarded pursuant to a small business 
set-aside or socioeconomic program set-aside, 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

[[Page 77956]]

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 prime contractor small 
business concern (SBC) that qualified for a small business program set-
aside procurement due to its socioeconomic program status. SBA proposes 
to revise all references to ``performance of work'' requirements found 
in parts 121, 124, 125, 126, and 127 to ``limitations on 
subcontracting.''
    The current method for determining whether a firm is in compliance 
with the limitation on subcontracting requirements requires the 
Contracting Officer (CO) to evaluate the percentage of the cost of the 
contract performance incurred for the prime contractor's personnel. 
This calculation excludes profit or fees from the cost of the contract 
and includes only those costs incurred for the prime contractor's 
personnel, which was defined as direct labor costs and any overhead 
which has only direct labor as its base, plus the contractor's General 
and Administrative rate multiplied by the labor cost. Additionally, 
Title 13, parts 124, 125, 126, and 127 repeated the performance of work 
requirements, and in places, contained additional information affecting 
the calculation for the performance of work requirements.
    SBA proposes 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. SBA believes that it is 
critical that small businesses that obtain set aside contracts comply 
with applicable subcontracting limitations. 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.
    In addition, the section would be reorganized and simplified for 
easier use. Proposed Sec.  125.6(a) would explain 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 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 Section 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/EDOSB 
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. Sec.  125.6(a)(1) and (a)(3) would address 
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) addresses how the limitation on 
subcontracting requirement would be applied to a procurement that 
combines both services and supplies. This provision would clarify that 
the CO's selection of the applicable NAICS code will determine which 
limitation of subcontracting requirement applies.
    Proposed Sec. Sec.  125.6(a)(4) and (5) would address the 
limitations on subcontracting for general and specialty trade 
construction contracts. SBA proposes to keep the same percentages that 
currently apply: 15% for general construction and 25% for specialty 
trade construction.
    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/EDOSB 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 
of and which qualified 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 the same 
small business program participants through subcontract awards.
    SBA proposes 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.
    SBA has concerns about the practical application of a regulation 
that would require only a certain percentage of contract awards to be 
either retained by the prime contractor, or spent on a similarly 
situated entity. SBA's concern is that an approach that limits its 
review solely to the first tier of the contracting process (agreements 
between the prime contractor and its direct subcontractors) could be 
fraught with abuse. For example, if small business A is awarded a 
$500,000 small business set-aside service contract and subcontracts 
$450,000 of the work to small business B, if the limitation of 
subcontracting requirements apply only to the first tier, then the 
Government's review would be complete. Small businesses A and B clearly 
meet the 50% rule. However, if small business B could further 
subcontract all of its $450,000 to a large business with impunity, then 
SBA believes that the intent of the subcontracting limitation 
requirements would be circumvented and small businesses would not be 
properly protected. In such a case, a large business would have 
performed $450,000 of a $500,000 contract (or 90%) of a contract that 
was set-aside exclusively for small business. In SBA's view, a large 
business that ultimately performs 90% of a small business set-aside 
contract unduly benefits from a contract intended to be performed by 
small business.
    SBA believes that the intent of the changes in the NDAA were to 
ensure that contracts awarded, and the benefits of those contracts, 
flow to the proper

[[Page 77957]]

beneficiaries. SBA does not believe that an intended consequence of the 
change was to make it easier to divert these benefits to ineligible 
entitles by merely moving contracts down one or two tiers in the 
contracting process. As such, SBA has 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 awarded these contracts to perform 
significant portions of the work, as well as 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 welcomes comments on this issue, including whether SBA's belief 
that there may be unintended consequences are misplaced, as well as 
comments about SBA's proposed solution. SBA also requests 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 proposes 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 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.
    Proposed Sec.  125.6(c) would explain how a small business concern 
certifies its compliance with the limitations on subcontracting and the 
date upon which compliance is determined.
    Proposed Sec.  125.6(d) would require that small business concern 
prime contractors, which intend to exclude subcontracts to similarly 
situated entities from the limitations on subcontracting, must identify 
those similarly situated entities and the percentage of the prime 
contract award amount that will be spent on each similarly situated 
subcontractor.
    Proposed Sec.  125.6(e) would address the process for continued 
compliance with the limitations on subcontracting when the award amount 
of a small business set-aside or small business program set-aside 
contract is modified. This process would require that the prime 
contractor provide the contracting officer with documentation to 
demonstrate how it will continue to satisfy the applicable limitations 
on subcontracting. SBA seeks comments on this process and specifically 
requests suggestions for how procuring agencies can more effectively 
monitor compliance with the limitations on subcontracting when the 
award amount has been modified after award.
    Proposed Sec.  125.6(i) would address 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(k) states that the limitations on 
subcontracting apply to the combined effort of the SBTA members, not to 
the individual members of the SBTA separately.
    SBA proposes to add new paragraph 125.6(j), which would exempt 
small business set aside contracts valued between $3,000 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) set-aside contracts, Women-Owned and Economically 
Disadvantaged Women-Owned small business set-aside contracts, HUBZone 
set-aside contracts and Service-Disabled Veteran-Owned 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 $3,000 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). Therefore, this proposed rule would 
not expand the application of the limitations on subcontracting to 
apply to small business set-asides below $150,000, but would merely 
adopt what the FAR has done. SBA wants to make clear, however, that the 
proposed rule would exempt the limitations on subcontracting 
requirements only with respect to small business set asides valued 
between $3,000 and $150,000. 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 $3,000 and $150,000. 
SBA requests comments regarding whether the limitations on 
subcontracting should apply to small business set aside contracts 
valued between $3,000 and $150,000.
    SBA's proposal to not apply the subcontracting limitations to non-
socioeconomically disadvantaged small business set-aside contracts 
between $3,000 and $150,000 does not, however, reduce the importance of 
these limitations on small business set aside contracts over $150,000 
and all contracts that are set aside for socioeconomically 
disadvantaged small businesses. 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. In addition, SBA requests comments on whether, for 
policy reasons and for purposes of consistency, the performance of 
work/subcontracting limitation requirements should apply to small 
business set aside contract with a value between $3,000 and $150,000. 
If SBA were to amend its regulations to apply those requirements to 
small business set aside contracts valued between $3,000 and $150,000, 
then a corresponding change to the FAR would be required for 
consistency purposes.
    Consistent with this concern, 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 proposes to add new Sec.  125.6(k) to incorporate 
these penalties into the regulations. Paragraph 125.6(k) states 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.
    This rule also proposes to revise Sec.  121.103(h)(4). Paragraph 
(h) discusses the circumstances under which SBA

[[Page 77958]]

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 proposes to revise this paragraph 
to exclude subcontractors that are similarly situated subcontractors, 
as that term is defined in 13 CFR 125.6(g)(3), from affiliation under 
the ostensible subcontractor rule. Such a position clearly flows from 
the NDAA's treatment of similarly situated subcontractors.
    SBA proposes to amend Sec. 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 
proposes 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 proposes 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 proposes to revise Sec. Sec.  125.15(a)(3) and (b)(3), which 
address the requirements for an SDVO SBC to submit an offer on a 
contract. SBA proposes 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 
proposes 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 also proposes 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 
proposes 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 proposes to revise Sec. Sec.  126.700 in its entirety, 
including revision of paragraph (a) and removal of paragraphs (b) and 
(c). This section currently addresses the performance of work 
requirements for HUBZone contracts. SBA proposes 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 to repeat the relevant limitations on 
subcontracting, and therefore SBA proposes 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 proposes 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 proposes to revise 
this paragraph to replace the reference to ``performance of work 
requirement'' with ``limitations on subcontracting.''
    SBA proposes 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 proposes to revise this 
paragraph by replacing the reference to ``performance of work 
requirement'' with ``limitations on subcontracting.''
    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 proposes to add a new Sec.  125.3(f)(8) to 
incorporate these provisions.
    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 may also be 
considered in any past performance evaluation of the contractor. SBA 
proposes to revise Sec.  125.3(f)(5) to incorporate this language. SBA 
is also proposing to add a new sentence to the end of Sec.  
125.3(f)(5), which prescribes 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.
    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 proposes to revise 
Sec.  125.3(f)(1) to incorporate this language.
    Section 1653(a)(5) of the NDAA requires that if an SBC is 
identified as a potential subcontractor in an 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 proposes to incorporate these 
requirements in new Sec. Sec.  125.3(c)(7) and (8).

Affiliation

    SBA proposes to make changes to its regulations in Sec.  
121.103(f), which defines affiliation based on an identity of interest. 
Paragraph 121.103(f)

[[Page 77959]]

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 is adding additional guidance on how to 
analyze affiliation due to an identity of interest. SBA believes that 
the additional clarifications will better enable concerned parties to 
understand and determine when they are affiliated.
    SBA proposes 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 proposes 
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. This is a rebuttable 
presumption. This proposed rule is based on size appeal decisions that 
have been issued interpreting this regulation.
    In paragraph (f)(2), SBA proposes to adopt a presumption that SBA 
established for the SBIR Program with respect to economic dependence. 
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. SBA believes that providing clarity on 
this issue will be beneficial for firms, and 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.

Joint Ventures

    SBA proposes 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 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 proposes to 
remove the restriction on the type of contract for which small 
businesses may joint venture without being affiliated for size 
determination purposes. SBA is proposing this change for several 
reasons. First, this proposed change would encourage more small 
business joint venturing, in furtherance of the government-wide goals 
for small business participation in Federal contracting. Second, this 
change would respond to results from the Small Business Teaming Pilot 
Program indicating more small business opportunities and greater 
success on small contracts than on large contracts. Third, this 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.

Calculation of Annual Receipts

    SBA proposes to amend Sec.  121.104, which explains how SBA 
calculates annual receipts when determining the size of a business 
concern. SBA proposes 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.

Recertification

    SBA proposes 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.

Small Business Innovation Research and Small Business Technology 
Transfer Programs

    SBA proposes to amend Sec.  121.702(a)(2), which addresses the size 
and eligibility requirements applicable to the Small Business 
Innovation and Research (SBIR) and Small Business Technology Transfer 
(STTR) Programs, to clarify that a single venture capital operating 
company (VCOC), hedge fund, or private equity firm may own more than 
50% of the concern 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. Business concerns and 
Federal agencies have misread the language of this paragraph to exclude 
all VCOCs, hedge funds, or private equity firms that own more than 50% 
of the small business concern, regardless of the investment entity's 
size. This paragraph explains the limitation on ownership by investment 
entities that are other than small and it is not meant to exclude those 
business concerns that are owned by investment entities that qualify as 
small business concerns.

Size Protests

    SBA proposes 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 would add 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

[[Page 77960]]

the WOSB/EDWSOB 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.

North American Industry Classification System Code Appeals

    The Agency is seeking comments on what is the appropriate timeline 
for filing a NAICS code appeal. SBA's regulations 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's current rule is designed 
to work within the timeframe of a standard procurement, namely that 
firms will have 30 days from the date the solicitation is issued to 
submit an offer. However, the standard 30 day timeframe is not utilized 
in all procurements, and SBA is currently examining whether the current 
rule is adequate to address the needs of the various types of 
procurements and various timeframes that are available. Determining the 
appropriate timeline for filing a NAICS code appeal should take into 
consideration that for the NAICS code appeal process to be meaningful 
there must be sufficient time for a contracting officer to amend the 
solicitation to notify potentially interested parties of the pendency 
of the NAICS code appeal, see Advanced Systems Technology, Inc. v. 
United States, 69 Fed.Cl. 474 (2006), an opportunity for any interested 
party to draft and file a cogent response, and time for the Office of 
Hearings Appeals (OHA) to review the record to determine whether the 
contracting officer's NAICS code assignment is based on a clear error 
of fact or law and issue a decision. Sometimes a NAICS code appeal is 
filed within days of the procurement closing. See generally NAICS 
Appeal of Phoenix Environmental Design, Inc., SBA No. NAICS-5582 (2014) 
(A timely NAICS code appeal filed on Friday, August 8, 2014, for a 
procurement closing on Friday, August 15, 2014.). SBA is also assessing 
the effect that a NAICs code appeal should have on the solicitation. 
Currently SBA's regulations require that the contracting officer, 
``[s]tay the solicitation.'' 13 CFR 121.1103(c)(1)(i). SBA is 
requesting comments on whether its regulations should provide that 
contracting officer should not award the contract or that the agency 
should delay the offer or bid response date.

Nonmanufacturer Rule

    SBA is proposing to clarify that the limitations on subcontracting 
and the nonmanufacturer rule 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. It provides that a concern may not be 
denied the opportunity to compete for a supply contract under Section 
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 $3,000 and $150,000. Thus, there is no 
specific statutory requirement that the nonmanufacturer rule apply to 
the mandated small business set-asides between $3,000 and $150,000. SBA 
believes that not applying the nonmanufacturer rule to small business 
set-asides valued between $3,000 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 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 supply small 
business set-aside 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 is proposing 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 proposes 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 
regulations. SBA believes 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.
    The proposed rule would also amend Sec.  121.1203, regarding 
waivers to the nonmanufacturer rule. SBA proposes 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 is also proposing in Sec.  121.1203(b) to allow some waivers to 
be granted after the contract has been awarded. SBA believes 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 
complete for contracts in a manner consistent with SBA regulations. SBA 
envisions 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.
    The proposed rule would also add a new Sec.  121.1203(d), dealing 
with waivers to the nonmanufacturer rule for the purchase of software. 
SBA is proposing to address whether the nonmanufacturer rule should 
apply to certain software that can readily be treated as an item and 
not a service. SBA is proposing to treat this type of software as a 
product or item of supply rather than a service. SBA believes 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

[[Page 77961]]

currently would treat the production any type of software as a service. 
This change would also allow for certain types of software to be 
eligible for waivers of the nonmanufacturer rule. SBA is proposing 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 or modify custom design 
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 with its own employees. 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.
    In order to address this scenario, SBA proposes 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 
nonmanufacturer rule. The 2012 NAICs manual provides the following 
definition for 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 is proposing that the 
procurement of this type of software would be treated by SBA as a 
supply requirement, and therefore the nonmanufacturer rule 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 nonmanufacturer rule because the 
contractor is performing a service, not providing a supply.
    SBA proposes 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 
proposes to amend this paragraph to include the correct citation, 
paragraph (b)(1)(iv).
    In addition, the proposed rule would amend Sec.  121.406(b)(7) to 
clarify that 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 and the Trade 
Agreements Act. This has always been SBA's policy, but because SBA has 
received several inquiries about this issue, SBA believes that for 
better clarity the policy should be specifically set forth in the 
regulatory text.
    In order to clarify whether the nonmanufacturer rule applies, or 
whether a general or specific waiver is attached to a procurement, SBA 
proposes to add a new Sec.  121.1206 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. SBA 
believes that this will help to provide clear guidance to prospective 
offerors. If a solicitation states that a waiver is being applied, 
prospective offerors will know that the nonmanufacturer rule will not 
apply to that procurement. If no notice of a waiver being applied is 
given, prospective offerors will know that the requirements of Sec.  
121.406 must all be met. This will give prospective offerors ample time 
to prepare, and will remove some of the uncertainty surrounding 
issuances of waivers to the nonmanufacturer rule. SBA also proposes 
that if a contracting officer seeks and is provided a waiver after 
issuing a solicitation, the contracting officer must give all potential 
offers a reasonable amount of additional time in order to respond to 
the solicitation. In SBA's view, whether a waiver applies or not has a 
meaningful impact on who may place an offer, and how prospective 
offerors may respond to a given solicitation. Therefore, SBA believes 
it is important that potential offerors have a reasonable amount of 
time to properly evaluate and respond to the solicitation.

Adverse Impact and Construction Requirements

    SBA proposes 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 proposes 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 intends 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.

Certificate of Competency

    SBA proposes to amend Sec.  125.5(f), which addresses SBA's review 
of an application for the Certificate of Competency (COC) program. SBA 
proposes 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

[[Page 77962]]

financial capacity to the potential award of an IDIQ contract. SBA 
clarifies this process by proposing changes to Sec.  125.5(f). The 
proposed changes state 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 proposes to revise Sec.  125.26 to replace the term ``Associate 
Administrator for Government Contracting'' with the term ``Director, 
Office of Government Contracting.'' There is no longer a position at 
SBA titled the Associate Administrator for Government Contracting and 
as a result, SBA proposes to update these regulations with the current 
title for the appropriate official who will receive correspondence 
related to SDVO protests.

Compliance With Executive Orders 12866, 13563, 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 
proposed 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 proposed rule implements Sections 1621, 1651, 1652, 1653 and 
1654 of the National Defense Authorization Act of 2013, Pub. L. 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 proposed changes should make SBA's regulations 
easier to use and understand.

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

    The proposed 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 proposed regulations also seek to address or 
clarify issues that are ambiguous or subject to dispute, thereby 
providing clarity to contracting officers as well as small business 
concerns.

3. What are the alternatives to this final rule?

    Many of the proposed regulations are required to implement 
statutory provisions, thus there are no alternatives for these 
regulations. The alternative to the proposed regulations that are not 
required by statute would be to not issue regulations, which would 
result in continued confusion, litigation and controversy.

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 E.O. 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 will have a 60 day comment period and will be 
posted on www.regulations.gov to allow the public to comment 
meaningfully on its provisions. In addition, the agency reached out to 
agencies, including the Forest Service, the Food and Drug 
Administration, and the Defense Logistics Agency. SBA then submitted 
the rule to the Office of Management and Budget for interagency review.
    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 proposed rule implements statutory provisions and will 
provide clarification to rules that were requested by agencies and 
stakeholders. The proposed 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 proposed 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 
proposed 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, if adopted in final form, 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

[[Page 77963]]

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 
proposed 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 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 326,000 concerns listed as small business 
concerns in the System for Award Management (SAM) 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, there are no new compliance or other 
costs imposed by the proposed rule on small business concerns. Under 
current law, firms must adhere to certain performance requirements when 
performing set aside contracts. Further, 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 
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 proposed amendments 
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 proposed rule would not have a 
significant economic impact on a substantial number of small business 
concerns.

List of Subjects

13 CFR Part 121

    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, 
Minority businesses, Reporting and recordkeeping requirements, Small 
business, Technical assistance.

13 CFR Part 125

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

13 CFR Part 126

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

13 CFR Part 127

    Government procurement, Reporting and recordkeeping requirements, 
Small businesses.
    Accordingly, for the reasons stated in the preamble, SBA proposes 
to amend parts 121, 124, 125, 126, and 127 of title 13 of the Code of 
Federal Regulations 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 adding paragraphs (f)(1) and (f)(2) and by 
revising paragraphs (h)(3)(i) and (h)(4) to read as follows:


Sec.  121.103  How does SBA determine affiliation?

* * * * *
    (f) * * *
    (1) Firms owned or controlled by married couples, parties to a 
civil union, parents and 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 in the previously completed fiscal year.
* * * * *
    (h) * * *
    (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.  
125.6(g)(3), 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

[[Page 77964]]

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 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 the following paragraph as footnote 20 
to NAICS code 511210.


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.

0
5. Amend Sec.  121.404 as follows:
0
a. Revise paragraph (f); and
0
b. 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) * * *
    (ii) * * *
    (D) 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.
* * * * *
0
6. Amend Sec.  121.406 by revising paragraph (b)(5) introductory text, 
(b)(7), and (d) 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 set-aside, WOSB or 
EDWOSB set-aside, or 8(a) contract?

* * * * *
    (b) * * *
    (5) The Administrator or designee may waive the requirement set 
forth in paragraph (b)(1)(iv) of this section under the following two 
circumstances:
* * * * *
    (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, any SBA waiver 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.
* * * * *
    (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 $3,000 and $150,000.
* * * * *
0
8. 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
9. Amend Sec.  121.1001 as follows:
0
a. Revise paragraphs (a)(1)(i) and (a)(2)(i); and
0
b. Add paragraph (b)(11) to read as follows:


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
10. 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: 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 a product in a specific 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

[[Page 77965]]

solicitation, including the period of performance.
    (d) Waivers for the purchase of software. (1) SBA may grant an 
individual waiver for the procurement of a software item 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, under a contract or subcontract 
at any tier, 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 (a)(1) of this 
section exceed 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
11. 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 meeting the specifications (including period of performance) 
required by a particular solicitation. Include a narrative describing 
market research and supporting documentation; and
* * * * *
0
12. 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
13. The authority citation for 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
14. 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
15. Amend Sec.  124.510 by revising the section heading and the text to 
read as follows:


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. (1) 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.
    (i) This includes Multiple Award Contracts that were set-aside, 
partially set-aside or reserved solely for 8(a) BD Participants.
    (ii) 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 or comply with 
the nonmanufacturer rule for each order.
    (2) The applicable SBA District Director may waive the provisions 
in paragraph (b)(1) of this section requiring a Participant to meet the 
applicable limitation on subcontracting requirement for each 
performance period (or for each order for an order set aside solely for 
eligible 8(a) Participants under full and open multiple award contracts 
or reserves). Instead, the District Director may permit the Participant 
to subcontract in excess of the limitations on subcontracting where the 
District Director makes a written determination that larger amounts of 
subcontracting are essential during certain stages of performance. 
However, the 8(a) Participant and procuring activity's contracting 
officer must provide written assurances that the Participant will 
ultimately comply with the requirements of this section prior to 
contract completion. The procuring activity's contracting officer does 
not have the authority to waive the provisions of paragraph (b)(1) of 
this section requiring a Participant to meet the applicable limitation 
on subcontracting requirement for each performance period, even if the 
agency has a Partnership Agreement with SBA.

    Example. Two task orders are issued under an 8(a) indefinite 
quantity service contract during the base period of the contract. 
The amount paid to the Participant on each of the two task orders is 
$100,000. The Participant

[[Page 77966]]

subcontracts $40,000 to subcontractors that are not similarly 
situated on the first task order. Where the relevant SBA District 
Director has not waived the requirements of paragraph (b)(1), the 
Participant could not subcontract more than $60,000 to 
subcontractors that are not similarly situated on the second task 
order in order to meet the requirement that it not subcontract more 
than 50% of the amount paid to it to subcontractors that are not 
similarly situated during the relevant performance period (i.e., in 
order to ensure that it would not subcontract more than $100,000, 
out of the $200,000 paid to it, to subcontractors that are not 
similarly situated).

    (3) Where the Participant does not ultimately comply with the 
performance of work requirements by the end of the contract, SBA will 
not grant future waivers for the Participant. Further, the contracting 
officer must document an 8(a) Participant's compliance with the 
limitation on subcontracting requirements as part of its performance 
evaluation in accordance with the procedures set forth in FAR 42.1502. 
The contracting officer must also evaluate compliance for future 
contract awards in accordance with the procedures set forth in FAR 
9.104-6.
0
16. 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
17. 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
18. Amend Sec.  125.1 by adding paragraph (x) to read as follows:


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

* * * * *
    (x) 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 HUBZone certified; 
for a small business set-aside, partial set-aside, or reserve a 
subcontractor that is a small business concern; for an SDVO SBC 
requirement, a subcontractor that is a self-certified SDVO SBC; for an 
8(a) requirement, a subcontractor that is an 8(a) certified; or a WOSB 
or EDWOSB contract, a subcontractor that is self-certified as a WOSB or 
EDWOSB. 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 is assigned to the procurement.
0
19. 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 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); and
0
g. Revise redesignated paragraph (b)(2).


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 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 believe a 
bundled or consolidated requirement is necessary and justified the PCR 
shall advocate against the consolidation or bundling of such 
requirements 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 with regard to 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 shall 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

[[Page 77967]]

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 19.505 (48 CFR 19.505).
* * * * *
0
20. Amend Sec.  125.3 as follows:
0
a. Add paragraphs (c)(8) and (c)(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) Compliance Reviews. (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
21. Amend Sec.  125.5 by adding a paragraph (f)(3) to read as follows:


Sec.  125.5  What is the Certificate of Competency Program?

* * * * *
    (f) * * *
    (3) Where a contracting officer finds a concern to be 
nonresponsible 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
22. Revise Sec.  125.6 by revising the heading and text 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 contract, 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), 
no more than 50% of the amount paid by the government to the prime may 
be paid to firms, at any tier, that are not similarly situated. Any 
work that a similarly situated entity further subcontracts to an entity 
that is not similarly situated will count towards the 50% subcontract 
amount that cannot be exceeded.
    (2) In the case of a contract for supplies or products (other than 
from a nonmanufacturer of such supplies), no more than 50% of the 
amount paid by the government to the prime may be paid to firms, at any 
tier, that are not similarly situated. Any work that a similarly 
situated entity further subcontracts to an entity that is not similarly 
situated will count towards the 50% subcontract amount that cannot be 
exceeded.
    (iii) In the case of a contract for supplies from a 
nonmanufacturer, the concern shall 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.
    (3) 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 to paragraph (a)(3). 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. Because the services 
portion of the contract is excluded from consideration, a small 
business manufacturer, together with

[[Page 77968]]

one or more similarly situated small business manufacturers, must 
perform at least 50% of the cost of manufacturing the supplies or 
products, or at least 50% of the $2,500,000 supply portion of the 
requirement (not including the costs of materials).

    (4) In the case of a contract for general construction, no more 
than 85% of the amount paid by the government to the prime may be paid 
to firms, at any tier, that are not similarly situated. Any work that a 
similarly situated entity further subcontracts to an entity that is not 
similarly situated will count towards the 15% subcontract amount that 
cannot be exceeded.
    (5) 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, at any tier, that are not similarly situated Any work 
that a similarly situated entity further subcontracts to an entity that 
is not similarly situated will count towards the 75% subcontract amount 
that cannot be exceeded.
    (b) Subcontracts to similarly situated entities. A small business 
concern prime contractor that receives a contract listed in Sec.  
125.6(a) 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 Sec.  125.6(a). 
Moreover, such subcontract to a similarly situated entity shall also be 
excluded from consideration under the ostensible subcontractor rule 
(Sec.  121.103(h)(4)).
    (1) A small business concern prime contractor must enter a written 
agreement with every similarly situated entity to detail the percentage 
of work forecasted to be performed by each entity. The agreement must 
identify the solicitation number at issue, be signed by each entity, 
and be attached to the prime contractor's offer.
    (2) Whether particular specific entities perform the forecasted 
amount of work is not material, as long as the similarly situated 
entities collectively meet the performance of work requirement.
    (3) SBA may consider any party's failure to comply with the spirit 
and intent of such a subcontract as 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).

    Example 1 to paragraph (b): 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 (b): A competitive 8(a) BD contract is 
awarded in the total amount of $1,000,000 for janitorial services. 
The prime contractor subcontracts $800,000 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 (b): 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.

    (c) Certification to meet limitations on subcontracting. A small 
business concern submitting an offer for a contract listed in Sec.  
125.6(a) must certify that it will meet the applicable limitation on 
subcontracting. If it is not apparent in the offer that the applicable 
limitation on subcontracting will be met, the contracting officer may 
seek a Certificate of Competency pursuant to Sec.  125.5. The procuring 
agency contracting officer must be satisfied that the small business 
concern prime contractor will satisfy the applicable limitation on 
subcontracting at the time of award.
    (d) Identify subcontractors and percentage of award amount 
subcontracted. If a small business concern prime contractor that 
receives a contract listed in Sec.  125.6(a) intends to use similarly 
situated entities in order to comply with the limitations on 
subcontracting, it must identify the similarly situated entities in its 
offer and the percentage of the prime contract award amount that will 
be spent on each similarly situated entity must be identified in a 
written agreement, in compliance with Sec.  125.6(b).
    (e) Modifications of award amount. If the prime contractor modifies 
a subcontractor's award amount after award of the prime contract, 
increasing the percentage of the prime contractor's award amount spent 
on subcontractors that are not similarly situated entities such that 
the prime contractor is no longer in compliance with the requirements 
of Sec.  125.6(a), the prime contractor must notify the contracting 
officer in writing of the change and how the change will affect the 
prime contractor's compliance with the limitations on subcontracting.
    (f) 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.
    (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

[[Page 77969]]

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) 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 amongst 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 perform the applicable percentage of work or comply with 
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.
    (i) Small Business Teaming Arrangements (SBTAs). Where an offeror 
is exempt from affiliation under Sec.  121.103(b)(9) of this chapter 
and qualifies as a small business concern for a reserve of a bundled 
contract, the limitations on subcontracting apply to the cooperative 
effort of the small business team members of the Small Business Teaming 
Arrangement, not its individual members. The contracting officer must 
document a small business concern's compliance with the limitations on 
subcontracting as part of the small business' performance evaluation in 
accordance with the procedures set forth in FAR 42.1502. The 
contracting officer must also evaluate compliance for future contract 
awards in accordance with the procedures set forth in FAR 9.104-6.
    (j) Inapplicability of limitations on subcontracting. The 
performance requirements (limitations on subcontracting) do not apply 
to: (1) small business set-aside contracts with a value greater than 
the micro-purchase threshold but not greater than the simplified 
acquisition threshold; or (2) subcontracts.
    (k) Penalties. Whoever violates the requirements set forth in Sec.  
125.6(a) 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.
0
23. 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 limitations on subcontracting 
required by Sec.  125.6 of this chapter.
* * * * *


Sec.  125.20  [Amended]

0
24. 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
25. 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
26. The authority citation for part 126 continues to read as follows:

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

0
27. 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
28. 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
29. Amend Sec.  126.700 by revising the title and text 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
30. The authority citation for part 127 continues to read as follows:

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

0
31. 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
32. 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?

* * * * *

[[Page 77970]]

    (a) Size of concerns. A joint venture of at least one WOSB 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;
* * * * *

    Dated: December 10, 2014.
Maria Contreras-Sweet,
Administrator.
[FR Doc. 2014-29753 Filed 12-24-14; 8:45 am]
BILLING CODE 8025-01-P


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